Frustrated with failure? R&D tax reliefs may ease the pain

The next big innovation has to come from somewhere and it is entirely possible that it will be funded by an R&D tax relief claim.

However, the road to innovation is paved with failure and there are times when uncertainty remains unsolvable with the current state of knowledge and technology.

Much like Da Vinci’s flying machine, some projects never succeed beyond the conceptual stage and this can be difficult for innovative businesses.

However, R&D tax relief claims may still offer some solace in trying times.

Do failed projects count as R&D?

If a failed project meets the standard criteria for R&D for tax purposes, then the fact that it was unsuccessful need not be a barrier to making a claim.

As a reminder, for R&D to be eligible for an R&D tax relief claim, it must seek an advance in science or technology that:

• Is significant in the sector.
• Cannot be readily deduced by a competent professional.
• Involves some degree of technical uncertainty.
• Features work conducted during the financial year.

There is no need for the project to finish within the tax year for which the R&D tax relief claim is submitted, nor is there any requirement for the project to be successful.

With failed projects, it will be necessary to show that work was conducted on the project during the relevant tax year, as this prevents people from imagining technology and submitting false claims for it.

Similarly, it should be made apparent why the competent professional thought they could resolve the uncertainty, even as their efforts to do so resulted in failure.

This means that innovative businesses cannot attempt ridiculous or ineffective solutions to problems for the sake of artificially inflating an R&D tax relief claim by utilising materials that are costly but would have no reasonable place in tackling the uncertainty.

What are the challenges of claiming for failed projects?

As mentioned, HMRC may have some reservations around the approach taken to resolving the scientific or technological uncertainty if it results in failure.

It would not be unreasonable for HMRC to call into question the competency of the professional involved, as it determines whether the failure could have been foreseen.

This is where a strong technical narrative can help secure the insights from the competent professional, as their understanding will be necessary to illustrate that the approaches taken could have worked in theory and why they did not work in practice.

There are times when factors beyond the control of the business result in a project being abandoned.

Abortive projects are also eligible to be included in an R&D tax relief claim, provided they meet the criteria.

In these instances, it should be made clear that the project was abandoned for other reasons so that the work conducted on it is not called into question.

In those instances, it may be possible to start work on the project at a later date and some reference to the previous work can be made at that stage.

It would be important to draw a clear distinction between work conducted in different tax years to avoid the risk of double claiming for expenditure.

As R&D tax consultants, we understand that not all R&D projects will be successful, but that this should not stop innovative businesses from doing their work.

We are specialised in assisting businesses and accountants with supporting a wide range of R&D tax relief claims so that novel work gets the recognition it deserves.

To make sure that failed R&D projects are not a complete cause of commiseration, speak to our team today for effective R&D tax relief support.

Tom Mason