How to Qualify for R&D Tax Credit

11 July 2019

Let’s explore how you can increase cashflow by utilising HMRC R&D tax credit.

As Businesses grow in scale, so too does a powerful opportunity that each business may encounter. With the right resources, they can improve the world around them.

Improving and developing new technologies and ideas comes at a hard cost, both in time and in finances.

A businesses Research and Development budget often strains with these new concepts.

With the R&D tax credit, businesses can help relieve those financial pressures so that they may continue to build upon the future.

How does this all work? How can you apply? Below we will walk you through the ideas and steps needed to put this tax credit to work for you.


What is the R&D Tax Credit?

The R&D tax credit is a government program used to boost the incentives of research and development in businesses.

This tax credit aimed to drive the economy and create newer jobs focused on technology and innovation.

The tax credit can help a business save hundreds if not thousands of dollars. At first, the tax credit focused on laboratory research.

Since then, the credit has expanded several times and is now a permanent fixture for all levels of R&D in business.


What is R&D tax credit?



The Four-Part Test

To qualify for these credits, you must pass the Four-Part test. This test requires you to provide ample proof of the following four aspects in order to receive the credit.

The following four parts all relate to the R&D project at hand. The tax credit works as a percentage of your QRE, or Qualified Research Expense. As such, the more projects that qualify under the Four-Part test, the bigger the credit.


1. Elimination of Uncertainty

The first demonstration covers that your modification designs focus on the improvement of function.

This means that your improvements started and stayed with the focus on the need and capability of increasing the effectiveness of what you were working on.

If your changes were for aesthetic purposes only, you will not qualify.


2. Process of Experimentation

This demonstration shows that you have taken the time to explore and look for any and all alternatives to get the desired result.

This means taking the time and resources to explore other possibilities. This is often done through simulation, trial and error, or systemic modelling.

Once you can prove that you attempted all routes, you will pass this portion of the test.


Shutterstock 249100360 E1606999748340


3. Technological in Nature

This part of the test requires you to show that all the resources used to achieve the new development, and the results produced, come from the hard sciences.

The hard sciences that qualify are engineering, physics, chemistry, biology or computer science. You cannot use things like art or opinion to get this part of the test.


4. Qualified Purpose

This last part helps to tie into the first demonstration. The qualified purpose refers to the purpose before, during, and after the development that looks to improve a process or product and nothing else.

This means that every element of your R&D process must have gone to searching for and refining improvement of a method. You cannot include costs that are there to keep the status quo or to continue the same operations and structures.


What is the purpose of your research and development?


R&D Tax Credit Activities That Meet Requirements

Now that you know the elements that go into the test itself, it may be good to consider some of the items that will work best for qualifying for the R&D tax credit.

The following are all potential ideas and cover a wide range of potential R&D projects. These categories do not cover every potential qualifying project, but it will be a good place to start.


1. New Concepts and Technologies

When you are breaking new ground, your R&D costs often soar in response. Building on top of previous models can be easy but building off of nothing but an unknown and untested concept can be huge.

It is good, then, that these kind of projects are often easy qualifiers for the R&D tax credit. They require a host of innovation and will be hitting new improvements by virtue of building on nothing.


Group of Business People Using Digital Devices and New Technology



2. Developing Prototypes and Models

As an idea begins to take shape, the long road of testing, tweaking, and building is a common way forward.

Building a prototype and working with testing models requires the kind of hard evidence and intense improvement that the R&D tax credit is looking for.


3. New Patents

The testing and brainstorming process has merit for getting that wanted R&D tax credit, but it doesn’t have to stop there.

As you are laying out the final plans for the patent making process, a lot of those elements qualify for the tax credit. You are breaking ground and putting out something new, even for a small adjustment.


Image of a businessman holding a icon which says "Research and Development Patent"


4. Streamlining a Manufacturing Process

Small improvements are also welcome to qualify for the R&D tax credit.

If you are refining your manufacturing process, you may qualify. You can create a more efficient factory machine or create a better management system.

If any of this pushes towards a strong benefit, like promoting worker health and keeping well-maintained deadlines, all the better.

Keep all the little refinements in mind. Overhauling an entire manufacturing process, even if it is a minor tweak, can cost massive amounts of money. Any savings can help make these refinements possible.


R&D Tax Credit – Covering All The Details

The R&D tax credit can be a lifesaver for businesses of any size ad as long as you qualify, you can cover some major expenses.

Keep in mind, this is based on every single R&D cost that can be marked as such. This includes employee salaries when working with R&D projects, supplies for the research teams, and even research that may be contracted to other companies.



Your Accountants Can Help

When dealing with complicated tax processes, like the R&D tax credit, it is best to make sure that you not only have the information you need but also the people who can help you the most.

We here at Maple pride ourselves at giving the best in accounting services you can buy. Interested in learning more?


Maple Accountancy is a firm of expert Business Advisors offering accountancy services, tax and business advice to owner-managed and family-owned businesses.

All clients are individual, and we tailor our service to your needs. Use the site to find out what makes us different and understand why you should appoint us.


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