Forget Research! How Does Development Qualify for R&D Tax Credit?
One of the common misunderstandings, that I see all the time, is the assumption that because a company is doing development but no real research they don’t qualify for research and development tax credit. This simply is not the case; it is the development aspect of a company’s activities that is often where the R&D qualifying costs are.
Water bottle production machineTake a company that makes plastic raw materials for their clients, producing little plastic pellets by the sack load for companies that will turn the pellets into finished products. You might well ask: Where is the R&D in that? The answer is there could be quite a bit. They will be involved in mixing base materials to produce plastics with certain properties to be used under particular conditions, such as in a hospital or in a kitchen. Perhaps the plastic has to be a very specific colour and resist high temperatures or be fade resistant in sunlight. For each new product, a sample piece of the finished plastic will have to be produced and it will need to be tested for things like tensile strength, heat resistance, light reflecting properties and several other factors.
There may also be some research to find new substances to mix into the plastic to meet a particular client’s requirement, such as a higher degree of strength. All of this development work will qualify for research development tax credit so long as the company is not acting as a sub-contractor. If the plastics company holds the commercial risk – i.e. they are working on spec and only get paid if they get the order, they qualify for R&D tax credits.
Now let’s look at a company that makes cosmetic products like shampoo, facial creams, hand and body wash and so on. Let’s say they are involved in making new white label and own label products and their products are high quality. They need to ensure they can meet clients’ requirements which might be for a face cream with anti-ageing properties, or a foot lotion that fights bacteria and is not going to make you slip and fall over when used in a wet area in a health spa. Each new product requires development and their clients don’t pay for a new product until they are happy with it, so the cost of activities to develop the product will be R&D qualifying costs.
They will need to do some research to ensure they are up to date on new ingredients and know about any health risks that might be associated with an ingredient or a mix of ingredients. But the vast majority of their R&D will be development. They will do development to come up with new recipes. The new product development process will involve trials and testing, even if only on friends and family. The testing process might be addressing questions like: Do we like the product? Does it smell and feel right? But new products also have to be tested for shelf life and will have to have a microbiology test. All this development work is qualifying R&D for tax relief/credit purposes.
I hope these two examples help to demonstrate how, what you might consider routine development in your company, is in fact qualifying R&D. It is the use of science and technology in the development or significant improvement of new products, processes, systems or services where you (as a competent professional in the relevant field) cannot simply deduce what needs to be done, that allows you to qualify for research development tax credit.
Are you ready to find out if you qualify or how much your R&D claims could be worth?