The BIS Guidelines
R & D begins when work on resolving scientific or technological uncertainty commences, and ends when that uncertainty has been resolved or abandoned. This will probably include a range of activities, part of which directly or indirectly contribute to the advances sought.
The 2004 BIS Guidelines play a pivotal part in defining R & D. Tax Insight have worked extensively with a wide range of companies to comply with these key definitions.[pl_alertbox type=”info”]
BIS Guidelines ( March 2004)
The definition of R&D
R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.
The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.
Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.[/pl_alertbox]
[pl_accordion name=”Research”][pl_accordioncontent name=”Research” number=”1″ heading=”Read more….” open=”no”]
Research and Development (‘R&D’) is defined for tax purposes in ICTA88/S837A.This states that the definition of R&D for tax purposes follows GAAP. SSAP13 is the accounting definition defining R&D and the first ‘hurdle’. The accountancy definition is then modified for tax purposes by the BIS guidelines, which are given legal force by Parliamentary Regulations. These guidelines explain what is meant by R&D for a variety of tax purposes. Finally, the rules of both the SME and Large schemes contain further restrictions and requirements which have varied almost annually since the schemes were first introduced.
The guidelines highlight a number of terms which are intended to have a special meaning for the purpose of the guidelines. Such terms are highlighted on first appearance and defined later. The recent case of Gripple Ltd v HMRC is clear indication that a purposive construction of the legislation and Guidelines is not readily accepted. If a company claims for R & D costs it must pay them, for example, a book entry for directors’ remuneration or group recharges may not qualify.
‘Advance in science or technology’
An advance in science or technology means an appreciable improvement to overall knowledge, or capability in a specific field, rather than the company’s own knowledge. This may result in a tangible consequence such as a new or improved product or process; or an intangible asset, such as know-how or cost improvements.[pl_accordion name=”A project”][pl_accordioncontent name=”A project” number=”2″ heading=”Read more….” open=”no”]
A project which seeks to, for example:
(a) extend overall knowledge or capability in a field of science or technology; or
(b) create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
(c) make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
(d) use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner)
will therefore be R&D.
Routine analysis, copying or adaptation of an existing product, process, service or material, will not be an advance in science or technology. Simply purchasing a hi tech product or system will not be R & D if there is no project context.
Overall knowledge or capability in a field of science or technology means the knowledge or capability in the field which is publicly available or is readily deducible from the publicly available knowledge or capability by a competent professional working in the field. Work which seeks an advance relative to this overall knowledge or capability is R&D. Overall knowledge can still be advanced where trade secrets or independent work by SME’s mean that more than one company works upon an individual industry solution.[/pl_accordioncontent][/pl_accordion]
‘Scientific and Technological Uncertainty’
In order for there to be R & D, there must be scientific or technological uncertainty when the company first considers its position. A common starting point (and hallmark of R & D) will be the possibility that the company does not even know if a solution exists. The Guidelines refer to a solution being ‘readily available’ so there are two extremes – hypothetical and ‘just out of reach’, both are within the R & D envelope.[pl_accordion name=”Scientific”][pl_accordioncontent name=”Scientific” number=”3″ heading=”Read more….” open=”no”] Scientific or technological 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. This includes system uncertainty. Scientific or technological uncertainty will often arise from turning something that has already been established as scientifically feasible into a cost-effective, reliable and reproducible process, material, device, product or service.
Uncertainties that can readily be resolved by a competent professional working in the field are not scientific or technological uncertainties. Similarly, improvements, optimisations and fine-tuning which do not materially affect the underlying science or technology do not constitute work to resolve scientific or technological uncertainty.[/pl_accordioncontent][/pl_accordion]
This will require the product or process to be ‘better than the original’ in a scientific or technological way. This may be because the project seeks something produced better, cheaper or ‘greener’. It may be because standard solutions are inadequate and lack ‘bespoke’ technological functionality. A simple upgrade will not be an appreciable improvement, neither will learning how to use existing technology efficiently.[pl_accordion name=”Appreciable”][pl_accordioncontent name=”Appreciable” number=”4″ heading=”Read more….” open=”no”]
Appreciable improvement means to change or adapt the scientific or technological characteristics of something to the point where it is ‘better’ than the original.
A process, material, device, product or service will not be appreciably improved if it simply brings a company into line with overall knowledge or capability in science or technology, even though it may be completely new to the company or the company’s trade.[/pl_accordioncontent][/pl_accordion]
Directly contributing activities will attempt to resolve the uncertainties within the project work. This will probably have involved the use of specialist staff or subcontractors in the core project phases of
- Planning work ( excluding commercial or financial activities)
- Solution seeking and theorems
- Prototype and dry runs
- Live testing and resolution
Marketing, HR, advertising and financial costs will not count…..[pl_accordion name=”Activities”][pl_accordioncontent name=”Activities” number=”5″ heading=”Read more….” open=”no”]
Activities which directly contribute to R&D include:
(a) activities to create or adapt software, materials or equipment needed to resolve the scientific or technological uncertainty, provided that the software, material or equipment is created or adapted solely for use in R&D;
(b) scientific or technological planning activities; and
(c) scientific or technological design, testing and analysis undertaken to resolve the scientific or technological uncertainty.[/pl_accordioncontent][/pl_accordion]
This is scientific or technological uncertainty that results from the complexity of a system rather than uncertainty about how its individual components behave.[pl_accordion name=”For”][pl_accordioncontent name=”For” number=”6″ heading=”Read more….” open=”no”]
For example, in electronic devices, the characteristics of individual components or chips are fixed, but there can still be uncertainty about the best way to combine those components to achieve an overall effect. However, assembling a number of components (or software sub-programs) to an established pattern, or following routine methods for doing so, involves little or no scientific or technological uncertainty, and will not be R & D.[/pl_accordioncontent][/pl_accordion]
A project consists of a number of activities directed towards attaining an advance in science or technology.[pl_accordion name=”It is”][pl_accordioncontent name=”It is” number=”7″ heading=”Read more….” open=”no”]It is important to get the boundaries of the project correct. It should encompass all the activities that collectively serve to resolve the scientific or technological uncertainty associated with achieving the advance, so it could include a number of different or failed sub-projects. A project may itself be part of a larger commercial project, but that does not make the parts of the commercial project that do not address scientific or technological uncertainty into R&D.
In order to determine whether a specific project meets the definition of R&D the project must exhibit certain characteristics. In general, R&D projects attempt to achieve an advance in science and technology through the resolution of technological uncertainty.
Research and Development is therefore a methodical investigation [project] carried out in a field of science or technology by means of experiment or analysis. This can be found just as much on a shop floor as in a laboratory or digital environment. The range of activities and their time line prior to commercial production, is known as the technological content of a project, or the ‘R & D ‘envelope’.
Activities that directly contribute to the resolution of Technological Uncertainty in an attempted advance in science or technology are eligible for relief.[/pl_accordioncontent][/pl_accordion]
Tax Insight has been working with these definitions and the HMRC Guidelines for the last twelve years. HMRC often make their own narrower interpretation of these guidelines, the Tax Insight process will ensure a neutral and fact based approach secures all relief that is actually due to the company.
You can do your own claim, the HMRC and BIS Guidelines are fairly readable, but run to over one thousand pages. The HMRC Guidance can be accessed here, http://www.hmrc.gov.uk/manuals/cirdmanual/cird81900.htm
Please note that it has not been updated for 26 months:
The BIS 2004 Guidelines run in tandem to the 2000 Guidelines and legally, either set can be taken when ‘grey’ definitions of R & D activities are in issue.
Access the full BIS Guidelines here…