When preparing R&D tax claims for clients, qualifying costs will form a significant portion of the submission, detailed in the Additional Information Form (AIF).
Depending on the type of project your client undertakes and the uncertainty they are addressing, building a new product or device may form a substantial part of the project cost.
However, there are only certain costs that can be claimed for relating to the creation of a new product.
Permissible costs
Under the R&D tax scheme, HMRC recognises that prototyping is an essential part of overcoming some uncertainties – such as a piece of bridging software to overcome incompatibility between two systems, where this cannot be solved by existing knowledge within the field.
When your client has made expenditures on prototyping, this can usually be included in a claim for R&D tax credits.
However, this is typically where eligibility for manufacturing costs stops.
Once a working prototype has been produced, HMRC will generally determine that R&D has stopped taking place as the uncertainty has been demonstrably solved or overcome.
What this means is that costs associated with the commercialisation of the product or device, such as mass manufacturing costs, cannot be included in a claim, since they aren’t deemed to have been incurred on R&D activity.
Also note that the key word here is ‘working’. If your client is addressing a particularly challenging uncertainty, HMRC also recognises that multiple prototypes may be required in order to fully overcome the uncertainty and add knowledge to that field.
For example…
Company A is a pharmaceutical business seeking to overcome an uncertainty relating to a common drug manufactured by a number of companies which causes severe side effects.
To improve the experience of patients and boost the drug’s commercial viability in the long term, the company invests in an R&D project to amend the drug’s chemical makeup – reducing side effects without reducing its efficacy.
After extensive research by specialist staff, Company A succeeds in making a small batch of the drug, which is shown to have more acceptable side effects during trials.
The leadership of the business receives approval to manufacture the new form of the drug.
In terms of R&D tax, once the trial is complete and the ‘prototype’ batch is deemed to be successful, R&D is deemed to have stopped.
This means that, while Company A can claim against costs for its specialist staff, consumables, trial costs and prototyping, it cannot claim for its subsequent commercial manufacturing costs.
We can help you to advise clients on qualifying costs and submitting their information to HMRC. Contact a member of our team to discuss your needs and how we can help.
