When approaching an R&D tax relief claim, it is common to consider the innovative work that a business has done to advance beyond the existing state of knowledge.
Much of the claim and the discussion around it will centre on all of the ways that the project has achieved a significant advance in the field of science or technology.
However, without knowing how things were before the project began, it is impossible for HMRC to appreciate the level of innovation conducted.
As such, it is imperative to establish the state of knowledge prior to the commencement of the project.
How do you establish the state of knowledge in an R&D tax relief claim?
Consulting with the competent professional involved in orchestrating the R&D work is a vital part of establishing the state of knowledge.
In doing so, it is possible to determine the eligibility of the competent professional and the state of knowledge at the same time,
This is due to the competent professional needing to demonstrate their technical experience and knowledge while potentially leveraging any contacts they may have to establish a clear sense of the state of knowledge.
The state of knowledge continually shifts, moved along by advances made in similar R&D projects, so it is necessary to note how things were at the commencement of the project.
HMRC notes in the CIRD80560 guidance that it is not prescriptive about the form this evidence takes, but that it “might include any patent searches, reviews of the scientific or technological aspects of competitor products, and trade journal or scientific articles which indicate the state of knowledge and advancement in the particular sector, technology or trade.”
By utilising existing research, it is possible to show more clearly how the project seeks to resolve scientific or technological uncertainty, as it is more demonstrable that innovation was required.
It is also worth noting that an innovative business’s own work may be contributing to the existing state of knowledge.
If a project was started in a previous year and has been included in a previous R&D tax relief claim, this needs to be noted when compiling the latest R&D tax relief claim.
It is not possible to simply reuse the existing narrative, but this should be referenced and the state in which the project is started or resumed needs to be clearly defined for the period in which it is claimed.
For example, if the work is halfway done in one year, that work needs to be summarised in the following year’s R&D tax relief claim so that the second half of the project is framed in the relevant context.
Why is establishing the state of knowledge important for R&D tax relief claims?
We recently discussed the complications that may arise if another innovative business makes a rival R&D tax relief claim and establishing the state of knowledge can help deal with this.
By showing that the rival R&D was not public knowledge when the project began, the success of another innovative company should not invalidate any other R&D tax relief claim that seeks the same advance.
This is because both claims will clearly be working from the same state of knowledge but neither would know of the other’s existence due to confidentiality and NDAs.
It is understandable that the current state of knowledge would inspire innovation in multiple businesses, as frustrations are common and inefficiencies are often well-known.
Clearly evidencing what is known when a project begins not only serves to strengthen the technical narrative of the R&D tax relief claim but is a vital tool in enquiry defence if allegations of copying another advance arise.
As R&D tax consultants, we work to fully maximise eligible claims and ensure they are well defended in the event of an enquiry.
Helping HMRC to understand the true depth of innovation increases the likelihood of a claim being accepted and strengthens the argument when enquiries do occur.
