ENGINEERING companies push technological boundaries on a daily basis. You might be developing tools to support safe well intervention in the oil & gas sector. Perhaps you machine complex profiled components from exotic materials within advanced engineering industries, such as aerospace or automotive? Chances are, you’re undertaking eligible R&D work and should look into claiming tax credits.
HMRC’s guidelines for what constitutes R&D are certainly extensive, but they’re not always clear! It can take a fair bit of time, not to mention head-scratching, to pick your way through the terminology and understand exactly how HMRC defines R&D.
Technological uncertainty vs technological unknown
One thing HMRC is clear about is that companies must be trying to achieve their goals by resolving ‘technological uncertainties’ within specific projects. So what’s meant by ‘uncertainty’?
Well, in the eyes of HMRC, there is a vast difference between technical uncertainties and technical unknowns. Technical unknowns on their own don’t count as eligible R&D, which only kicks in when technical uncertainties arise. The distinction between the two essentially comes down to whether or not a problem can be readily resolved by a competent professional. If it can, then it isn’t a technological uncertainty. R&D only begins when conventional knowledge has been applied and exhausted, without a resolution to the problem.
An oil and gas company aims to develop improved umbilicals for supplying hydraulic power, electrical power and fibre optics to subsea equipment. It procures three umbilicals produced by competitors and tests each to qualify the performance. Although the performance of each umbilical is unknown at the outset, it is possible to reverse engineer the products using conventional methods. This data may provide engineers with a clear idea on how to develop improved umbilicals. In this case, the unknown has been resolved (i.e. the performance of the competitors’ product) and, as established methods were used, this doesn’t constitute R&D. However, if, once the unknowns have been resolved, it’s still unclear how the engineers will develop more robust, durable and efficient umbilicals, then this becomes a technical uncertainty and R&D begins!
Trial and error
Another minefield on the fine line between eligible and ineligible R&D is trial and error! If you think of trial and error as experimentation using routine methods, then when it’s used to remove unknowns that precede R&D it’s ineligible, but if it’s used to resolve technical uncertainties that form part of R&D then it is eligible.
If a subsea firm is using trial and error to establish the best cutting tool for a ROV application from an existing range of tooling, this wouldn’t be considered eligible R&D. Why? Because the company knows that with this trial it will find the optimum tool for its purpose. If, instead, a company uses experimentation and testing to determine how different parameters affect fundamental material properties, and this knowledge hasn’t been documented in the open domain, then this is R&D. Why? Because in the second example, a systematic process is being adopted for the generation of knowledge that can be codified for future use.
Advancements in a company’s processes only qualify as eligible R&D if they’re geared towards advancing science and technology, not simply increasing profits.
If a manufacturer of subsea ancillaries installs state-of-the art equipment to improve a production process, but is then forced to carry out major adaptations to resolve technological uncertainties before this improvement can be seen, then this is eligible R&D. However, if process improvement is carried out purely for commercial gain – such as improving the process using standard methods with a view to increasing production rates – then it doesn’t count as R&D.
Slippery stuff, and this is just the tip of the iceberg when it comes to the many specific definitions of eligibility on HMRC’s website. No wonder companies find applying for R&D tax relief on their own quite so daunting and confusing.
For a free R&D tax credit consultation and analysis of the potential returns you might expect, contact our Jumpstart representative in Aberdeen and the North-east: Ian Donaldson on 07527 635787, firstname.lastname@example.org or visit the website: jumpstartuk.co.uk.