What counts as research and development in engineering?
How do you know whether your engineering projects might qualify for research and development tax relief? One quick test is to look at examples of successful claims in the engineering sector.
First, though, we’d better take a moment to talk about terminology: just to confuse things, HMRC has its own specific definition of R&D that doesn’t necessarily marry up with how the term is used in the engineering sector.
In engineering, it’s usually tied to a specific professional role – that of R&D engineer – and refers broadly to work taken to improve existing products, and develop new ones. The typical image is of a lab full of people in white coats carrying out experiments.
This is where we rollout that well-worn phrase ‘for tax purposes’. When you’re thinking about R&D tax relief claims for your engineering firm, just focus on the specific statutory definition HMRC uses:
“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.”
So, that’s simultaneously more specific, and also broader. What it means in practice is that lots of what engineers do could qualify, even if, by the standards of their own industry, it doesn’t necessarily feel like R&D.
We’ve got a plain English version we sometimes use that makes it even clearer:
Any development undertaken where the end result has made the product or process bigger, better, stronger or faster is likely to qualify as an advance in R&D for tax purposes.
Keep that in mind as we run through a few examples.
First, let’s look at what you might call the official examples – the ones HMRC includes in its own guidance. The most relevant is the one for what they call ‘advanced engineering’:
“A project is commissioned to produce a prototype (not to be sold) that will test a design for a new eco-petrol engine and exhaust. The goal is to achieve a substantial reduction in eco-unfriendly emissions with a performance at least as good as a comparable engine. This appears to competent professional engineers to offer hope of achieving a real advance by way of an improvement in vehicle technology. The uncertainty in science and technology is whether this substantial reduction with the comparable performance sought is possible. Even if unsuccessful, this and the construction of the prototype is still a qualifying R&D project.”
To provide more content, we also have some examples of our own, based on experience with real clients.
The development of advanced refurbishment techniques to (a) integrate modern materials into legacy structures and so (b) create a new or appreciably improved structure with lower energy consumption – that will probably qualify.
Appreciably improving existing engineering techniques to reduce project time and costs, or meet emerging environmental standards? That, too.
Then there’s Company A, which sought to develop a new range of acrylic panels to deliver a range of performance improvements relative to existing polycarbonate products:
- better light quality and colour rendering visible to observers
- reduction in ‘yellowing’ which can be visible in polycarbonate sheets
- simultaneously high levels of light output and maximum light diffusion – no LED hotspots.
Bigger, better, stronger, faster – see what we mean?
A word of caution, though: it’s important to think through any claim very carefully and retain evidence to support your thinking.
A recent first-tier tax tribunal makes this point well. A Sheffield-based engineering firm lost its appeal over R&D tax relief claims dating back a decade not because their claim was bad, as such, but because they couldn’t answer HMRC’s questions confidently or provide supporting paperwork.