R&D meaning: what counts as R&D for tax relief

What does R&D stand for?

In everyday business use, R&D covers any work a company does to create new products, processes or knowledge. R&D tax credits use a narrower meaning. The definition is set by section 1006 of the Income Tax Act 2007, which follows generally accepted accounting practice and is then modified by guidelines issued by the Secretary of State. ^[1] The same definition applies to claims under the merged R&D scheme. ^[3]

This guide answers the tax reading of the question. If you were looking for a company's R&D department or an R&D job, the section on jobs and departments explains how those differ.

What counts as R&D for tax purposes?

R&D takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to that advance, by resolving scientific or technological uncertainty, are R&D. Certain qualifying indirect activities linked to the project count as well.

Three ideas sit behind that wording:

• An advance in science or technology. This means an advance in overall knowledge or capability in a field, not only the company's own state of knowledge. A product does not become an advance just because science or technology was used to make it.
• Scientific or technological uncertainty. The project has to tackle something an expert in the field could not readily work out.
• A project. A set of activities carried out to a method or plan, with boundaries that take in everything that helps resolve the uncertainty.

Projects that may count include extending overall knowledge in a field, creating a product that represents an increase in capability, making an appreciable improvement to an existing process or product through scientific or technological changes, and using science or technology to duplicate the effect of an existing product in a new or appreciably improved way.

An advance can be physical, such as a process that produces less waste, or less tangible, such as new knowledge.

What is scientific or technological uncertainty?

Uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field. System uncertainty, which comes from the complexity of a whole system rather than from its individual components, can count.

Uncertainty often arises when something already shown to be feasible has to become a cost-effective, reliable and reproducible process or product.

Some problems do not qualify. Uncertainties that a competent professional in the field can readily resolve are not scientific or technological uncertainties. Neither are improvements, optimisations and fine-tuning that do not materially affect the underlying science or technology.

A company should be able to explain the work it did to overcome the uncertainty. A simple description of what worked and what failed can be enough, and showing that earlier attempts at a solution failed may help.

What does not count as R&D?

Some work falls outside the definition:

• Routine analysis, copying or adaptation of an existing product, process, service or material is not an advance, even if it is new to the company.
• Taking existing science or technology and using it in a new context, such as a different trade, with only minor or routine changes is not an appreciable improvement.
• The commercial and financial steps needed to market a new product, the production and distribution of goods, and general administration do not directly contribute to resolving the uncertainty.
• Work in the arts, humanities and social sciences, including economics, is not science for this purpose. A claim cannot rest on an advance in those fields.

From April 2023, mathematical advances are treated as science for the purposes of the guidelines, whether or not they describe the physical universe.

Does the project have to succeed?

No. If the advance sought is not achieved or not fully realised, R&D can still take place.

An advance can also still count when similar work has already been done but the details are not readily available, for example because it is a trade secret.

R&D begins when work to resolve the uncertainty starts. It ends when the uncertainty is resolved or the work to resolve it stops. Work to identify the requirements for a product, where no scientific or technological question is at issue, is not R&D.

Is that the same as R&D in a job or a company department?

Not necessarily. A team called R&D may do work that meets the tax definition, work that does not, or a mix of both. The tax test looks at each project and what it was trying to resolve, not at a job title or a department name.

The same goes for general definitions of R&D found in dictionaries and business textbooks. They describe the activity in broad terms. The tax guidelines add conditions such as an advance in overall knowledge and the resolution of uncertainty that a competent professional could not readily work out.

Which companies can look at R&D tax relief?

Only companies chargeable to UK Corporation Tax can qualify for R&D relief. ^[2] For accounting periods beginning on or after 1 April 2024, a company also needs to be trading and to have a project that meets the definition. ^[3]

Whether a particular project meets the definition is a judgement that depends on its facts. A specialist adviser can look at the detail, and HMRC decides whether a claim is accepted.

What is eligible R&D expenditure?

A company can claim the allowable costs that relate to its direct R&D activity and to qualifying indirect activities, which are tasks that form part of the project but do not directly contribute to the resolution. ^[4] Qualifying indirect activities include scientific and technical information services, such as preparing the original R&D findings report, and feasibility studies to inform the strategic direction of a specific R&D activity.

Two general limits to bear in mind are:.

• Only the costs listed in the official guidance on R&D costs can be claimed, and capital expenditure is one example of a cost that cannot be claimed.
• Costs count only from the start to the end of the project, and a cost must already have been paid before the claim is made.

Examples of costs that may qualify include:

• Staff costs for the time staff spend working on the R&D project, including secondary Class 1 National Insurance contributions paid by the company.
• The proportion of consumable items used up in the R&D, but not where the items are sold or ownership of them is transferred.
• Licence fees for software used for R&D, and a reasonable share of the costs of software only partly used in R&D activities.
• For accounting periods beginning on or after 1 April 2023, most data licence and cloud computing costs spent on R&D, but not those for qualifying indirect activities.

Our guide to how R&D tax credits are calculated covers how these costs feed into the credit, and how contractors and externally provided workers are treated.

What does a company need for an R&D claim?

For accounting periods beginning on or after 1 April 2024, only the company who makes the decision that R&D needs to be carried out can claim the tax relief. ^[4] For those periods, a company doing R&D to fulfil a contract can claim for that work only if it can provide evidence that it made the decision to carry out the R&D and planned it, and the company it is working for did not initiate the R&D or know it needed to be done to fulfil the contract.

If the company is an SME, it may be able to apply for advance assurance to confirm its claim will be accepted. Advance notification to HMRC is covered in our guide to how far back you can claim R&D tax credits.

What form does an R&D claim go on?

If the project meets the qualifying conditions for R&D, the expenditure credit is claimed in the Company Tax Return (CT600). ^[5] A company must complete and submit an additional information form to HMRC for each accounting period it claims for new claims.

The order in which the form and the return are sent, and the timing of each step, are covered in our guide to how far back you can claim R&D tax credits.