By Karen Baker, Technical Analyst
Chemical companies are one of the traditional R&D companies, advancing science on a regular basis. Chemistry covers a broad range of companies, from pharmaceutical companies investigating the mode of action of a new drug, to companies developing new materials for use in the oil & gas industry. You may well understand what constitutes R&D in a lab coat and goggles sense, but did you realise that those issues you’re dealing with in the pilot plant relating to raw material variability, or unexpected results when scaling up formulations, could all be eligible R&D from HMRC’s viewpoint?
HMRC’s guidelines for what constitutes R&D are certainly extensive, but they’re not always clear! It can take a fair bit of time, not to mention head-scratching, to pick your way through the terminology and understand exactly how HMRC defines R&D.
Technological uncertainty vs technological unknown
One thing HMRC is clear about is that companies must be trying to achieve their goals by resolving ‘technological uncertainties’ within specific projects. So what’s meant by ‘uncertainty’? Well, in the eyes of HMRC, there is a vast difference between technical uncertainties and technical unknowns. Technical unknowns on their own don’t count as eligible R&D, and only when technical uncertainties arise does a likely R&D project begin. The distinction between the two essentially comes down to whether or not a problem can be readily resolved by a competent professional. If it can, then it isn’t a technological uncertainty. R&D only begins when conventional knowledge has been applied and exhausted, without a resolution to the problem.
For example:
A chemical waste recycling company aims to develop a method to separate methanol from a dichloromethane chemical waste stream. It needs to identify the level of impurity and so applies standard gas chromatography methodologies as it would for any typical waste stream. Although the level of impurity is unknown at the start of the project, it is possible to carry out the identification tests using the conventional methods. This data would then give the chemists a clear idea of the methanol level in the waste stream. In this case, the unknown has been resolved (i.e. the methanol level) and, as an established standard gas chromatography method was used, this doesn’t constitute R&D. However, once the unknown has been resolved and it is unclear how to remove the impurity, this then becomes a technical uncertainty and R&D begins!
Trial and error
Another minefield on the fine line between eligible and ineligible R&D is trial and error! If you think of trial and error as experimentation using routine methods, then when it’s used to remove unknowns that precede R&D it’s ineligible, but if it’s used to resolve technical uncertainties that form part of R&D then it is eligible.
For example:
A specialist ink manufacturing company aims to investigate the most suitable yellow pigment for its standard water-based ink product. The company uses trial and error to experiment with yellow pigments from various manufacturers, knowing that the pigments are all off-the-shelf standard products. This wouldn’t be considered eligible R&D, as the company knows that this trial will identify the best pigment for its purpose. However, if instead the company uses trial and error to determine the chemical stability changes in its ink from trialling three newly developed ink pigments, and the reasons for the changes, then this is R&D as the company is using trial and error to generate new industry knowledge.
New Product Development
Advancements in a company’s product portfolio only qualify as eligible R&D if they incorporate an advance in science and technology, not simply packaging established knowledge in a different way.
For example:
Five years ago, a materials company developed a nanocomposite polymer coating for subsea use that could withstand corrosion of steel pipes. At the time, this was eligible R&D and the company claimed accordingly. This year, the company used its coating on an expanded range of its steel pipes, varying in their length and diameter. The company did not encounter any further difficulties in applying the coating, but did manage to improve its product range for its customer. This work on new product development does not constitute R&D.
Slippery stuff, and this is just the tip of the iceberg when it comes to the many specific definitions of eligibility on HMRC’s website. No wonder companies find applying for R&D tax relief on their own quite so daunting and confusing.
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