These projects spanned a wide spectrum, from crafting bespoke software systems and tools to refining manufacturing processes for efficiency, resulting in reduced waste or build times. Some projects even involved tweaking existing equipment to function better in specific applications. The argument that businesses often used in claims was that “there’s no existing technology that can match this solution.” While this might have had some factual basis, and it’s true that additional functionality or capability might have emerged, it falls short as solid evidence to support a project’s eligibility under the BIS guidelines.
Understanding technological baselines and eligibility
For a valid R&D Tax Relief claim, a project must actively seek to advance knowledge in a field of science or technology by resolving scientific or technological uncertainties. To claim an advance in a field of science or technology, you need to compare it against a baseline level of knowledge or capability in that field. This is a key point when determining whether or not a claim qualifies for relief. It might be that there’s no existing product or service that can provide a functional solution to a specific problem. Still, if the solution can be developed using existing knowledge or capability in a field of science or technology, the project doesn’t qualify for R&D tax relief. In that case, there’s no technological or scientific uncertainty, and no corresponding advance has been achieved.
As HMRC continually tightens its scrutiny to ensure that only companies genuinely undertaking R&D for tax purposes receive relief, it is critical to present a clear scientific or technological baseline when submitting a claim. The advance in science or technology is assessed against this baseline, and the success of the entire claim hinges on clearly presenting this advance.
Technological baselines in practice
Let’s take a look at an example. A company may consider that it qualifies for R&D tax relief on the basis of meeting the requirements of CIRD 81910 Paragraph 9c. This allows businesses to claim R&D tax relief based on making appreciable improvements to an existing process, material, device, or service through scientific or technological changes. Let’s say they’ve created a more efficient device for a specific task compared to existing devices. It’s crucial for the company to carefully pinpoint the field in which the advance has been made.
Was it through an advance in hydraulic engineering which surpassed known solutions? Or, it could be an advance in mechanical engineering as the structure of the device was re-engineered to provide greater capability. Maybe the improved capability was a result of developing a new, higher-performing material that was incorporated into an existing design? Simply stating that a product is better than anything else currently available is not sufficient evidence to ensure that a claim will not be challenged by HMRC. You need to be as specific and detailed as your circumstances allow.
Challenges to claims are increasingly based on the competency of the professionals involved in its preparation. If the technological baseline is poorly defined, HMRC might argue that the work is bespoke to the company and doesn’t represent an overall advance. This is especially true if the work sounds routine and within the skillset of a competent professional. To avoid such challenges, provide HMRC with robust evidence of baseline capability by presenting existing solutions to a problem and explaining their limitations. This not only lays a solid foundation for an R&D project, but it also demonstrates to HMRC that a thorough assessment of the technology area has been conducted by someone with the necessary technical skills and experience.
How to establish a technological baseline
Establishing a technological baseline is best done by showing existing solutions to a particular problem and outlining their limitations. This establishes a sound foundation upon which to start an R&D project. It also conveys to HMRC that a thorough assessment of the area of technology has been undertaken by a knowledgeable, competent individual before the company has formed a view that it has undertaken qualifying work.
Presenting a clear technological baseline helps support the technological uncertainties encountered in a qualifying project. It can be used to show that the development work undertaken by the company would not be considered to be routine. With both a strong technological baseline in place and any technological uncertainties established, HMRC should have a clear understanding that an advance in science or technology was required in order to develop a solution. In any event, they would find the claim much more difficult to challenge if they sought to deny relief.
There’s no doubt that writing an effective R&D narrative can be a tricky process, especially with HMRC’s guidance being as open to interpretation as it has been in the past. And now, HMRC is running a tighter ship and issuing compliance checks at a higher rate than ever before. That’s why it’s so important to get the little things right from the start, and carry them forward through each of the claims that you submit.
If you’re interested in learning more about the importance of the technological baseline, and the other key elements of a successful R&D claim, then we have some great courses to choose from: