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In order to cut through crowded markets, businesses work to find whatever advantage they can over the competition.
This results in a lot of work being conducted to push the boundaries of what is possible for the business.
However, there is a clear line between commercial innovation and R&D that must be understood by accountants helping clients with R&D tax relief claims.
Can commercial innovation qualify as R&D?
Most R&D work conducted by a business will likely be some form of commercial innovation, but not all commercial innovation will be considered R&D.
To determine the difference between the two, it is vital to know HMRC’s definition of R&D.
Qualifying R&D must:
- Be significant in the sector
- Not be readily deduced by a competent professional
- Involve some degree of technical uncertainty
- Feature work conducted during the financial year
A new product could feasibly meet these requirements if it represented a genuine advance for the field of science and technology as well as for the business itself.
The most likely examples would be creating something that is more durable, made of more environmentally sustainable materials or replicating existing qualities with a bespoke process that reduces costs.
However, simply launching something new for the business is not likely to be R&D.
A patisserie might have worked hard to create a croissant that has the texture of a jam roly-poly, but this would be viewed as an entirely commercial innovation.
How is commercial innovation handled in an R&D tax relief claim?
Commercial innovation can only be included in an R&D tax relief claim if it is genuine R&D.
For the most part, aesthetic changes or research into marketing are ineligible and must be excluded from the claim.
This will see costs associated with these processes left out of calculations and the technical narrative should conclude once the scientific and technical work finishes.
Even in cases where valid R&D is also a commercial innovation, the commercial aspects are not relevant to include.
Focusing too much of a technical narrative on the marketability of the product derails the R&D tax relief claim and increases the likelihood of HMRC launching an enquiry.
In the event of an enquiry, all traces of commercial innovation would need to be scrubbed from the R&D tax relief claim so that only the genuine advance is present.
Accountants may be unsure of how HMRC view innovation, so working with an R&D tax consultant is an effective way of being confidently compliant.
Our team understands how HMRC assess R&D tax relief claims and can ensure that you are able to know whether a client’s work will count or should be left out.
If you want to determine whether a client’s work is commercial innovation, R&D or both, speak to our team today!
Adam Bointon is a Technical Director specialising in R&D Tax Credits for SMEs in manufacturing and software sectors. With over 15 years’ experience, he works closely with businesses to identify qualifying R&D activities and prepare clear, compliant claims. He combines technical expertise with a strong understanding of economics and finance to support successful outcomes. Adam also contributes to industry webinars and CPD sessions, sharing insights on R&D tax relief and HMRC requirements.
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