How to identify eligible R&D projects within your company for R&D tax relief

Understanding the eligibility criteria for R&D tax relief can unlock valuable financial benefits for the projects within your business. However, many businesses don’t realise what they need to prepare in order to identify qualifying R&D activities due to a misunderstanding of what the R&D tax credit criteria involves. 

Research and development eligibility goes beyond laboratories and scientific breakthroughs. HMRC recognises a broad range of innovative activities across multiple industries, provided they comply with the Department for Science, Innovation and Technology (DSIT) guidelines.

But the real question is, how do you identify R&D tax credit eligibility? In this blog, we are going to be sharing professional insight and guidance into what you need to look for to spot eligible R&D projects. 

What does HMRC consider as R&D for tax relief purposes?

HMRC defines research and development for tax relief purposes as work that seeks to achieve an advancement after overcoming scientific or technological uncertainties. 

A project does not need to succeed to qualify for R&D tax relief. The project has to showcase the attempt to overcome the uncertainty through detailed testing, experimentation or analysis information. If your business has been trying to develop, improve or adapt a process, product or system and faced some technical challenges along the way, you could be eligible to claim R&D tax relief for your business.

How would you spot eligible R&D projects in practice?

To assess your project’s eligibility for claiming R&D for tax relief purposes, businesses should review the project and decide if they were attempting to achieve an advancement that was scientific or technological. Projects that have faced trial and error, specialist knowledge and problem solving where the solution was not obtainable are also indicators of eligibility. 

If the scientific or technological uncertainty could not have been easily resolved by a competent professional using existing knowledge or publicly available information at the outset of the project, the work may qualify for R&D tax credit relief.

What activities are excluded from R&D tax relief?

While HMRC recognises several qualifying R&D activities, there are some activities that are actually excluded from the R&D qualifying criteria, so it is vital that businesses understand they differentiate to avoid any risk of unexpected delays or reduced relief.

Examples of non-qualifying R&D activities can look like the production and distribution of goods and services, business administration and other supporting services not directly relating to R&D. Please don’t hesitate to get in touch if you are wanting to learn more about non-qualifying and qualifying R&D activities. 

What is the difference between direct and indirect R&D activities?

HMRC differentiates between direct and indirect R&D activities, and both can be eligible when correctly identified and documented. However, you may be left wondering what the difference is between the two, below we have explained the difference.

Direct R&D activities are those that actively seek to overcome scientific or technological uncertainties. These activities include developing, designing and testing new products or processes. Direct R&D activities could also include conducting experiments, analysing failures to refine solutions, or writing and testing software code.

On the other hand, indirect R&D activities support direct research and development but they do not directly resolve scientific or technological uncertainties themselves. Examples of indirect R&D activities include project management that specifically relates to R&D, data collection to support experimentation, the maintenance of of R&D environments and some administrative tasks that directly supports R&D projects.

What documentation will HMRC be expecting?

Documentation plays a crucial role in ensuring the eligibility of your R&D tax relief claim and this is down to HMRC expecting a clear detailed explanation of the scientific or technological uncertainties faced during the project process. It is also vital to describe why these uncertainties could not be easily resolved, what steps were taken to address them and which qualifying activities were undertaken during the project process.

All of this information must be clear and easy to follow, meet the criteria given by HMRC and be provided through the R&D Additional Information Form (AIF). 

What is classed as qualifying R&D expenditure?

Once a project has qualified for R&D, businesses can then claim relief on the qualifying R&D expenditure. Qualifying R&D expenditure may include elements such as staff costs for employees that have been directly involved in the R&D process, employer National Insurance contributions and pension costs, costs for subcontractors and externally provided workers, and any consumables or software used during the R&D project.

Understanding how to spot eligibility within your R&D projects requires a clear grasp of HMRC’s criteria, including qualifying and non-qualifying activities and how to correctly identify the differences between direct and indirect R&D work.

How does HMRC’s R&D eligibility tool work?

The HMRC R&D eligibility tool is a useful resource when it comes to getting a brief understanding of your current R&D position. The checker takes around 5-10 minutes and will run through a series of yes and no questions that focuses on your project’s potential R&D approach. Based on your answers, the tool provides an indication of how likely your project is to qualify for R&D tax credit relief.

From HMRC’s R&D eligibility tool to our R&D tax credit calculator, there is a wide variety of resources available to help you learn more about the eligibility criteria. 

At Alexander Clifford, we pride ourselves on providing premium R&D tax credit advice and guidance to help you achieve the best possible outcome from your R&D claim. Our team of dedicated specialists can support your enquiry of any size.

If your business is seeking further information on the R&D eligibility criteria, our R&D tax credit specialists can guide you through the process and help you achieve a compliant and successful R&D tax relief claim.