There has been this ongoing problem for companies that are solving technological or scientific uncertainties (and therefore,on the face of it, qualify for research & development enhanced tax relief) yet the product that emanates from this R&D process is ultimately sold to a customer e.g. a prototype that is sold rather than skipped.
HMRC’s view has been that if the product was sold it must represent excluded “production” activities rather than a qualifying R&D process and therefore cannot be qualifying expenditure.
The thinking here is that the R&D tax credit exists to encourage investment in the advancement of scientific or technological knowledge where there is no alternative market driver so, on the flip-side, if there are customers willing to purchase the fruits of your labour then why do you need the tax credits? But this analysis does not stand up to economic scrutiny for 99% of SMEs; in that you may not have known how to achieve what you ultimately created but, if you are successful, why on earth would you want to dump your invention or prototype in the skip if there happens to be a willing buyer?!!
The good news is that recent HMRC guidance has softened this approach. It is not a complete reversal of policy but rather an acceptance that there may be instances where costs of developing products do qualify for the R&D tax relief despite ultimate sale.
A key takeaway from this will be the heightened need for appropriate documentation to evidence when the qualifying R&D ceased and excluded “production” activities commenced.
An improvement to this tricky area – yes – but does this go far enough? How might this impact on your company’s R&D activities and future potential claims?
