Invest to Grow: Why product development qualifies for R&D relief

R&D Tax North West

This blog post is part of the Greater Birmingham Chambers of Commerce’s Invest to Grow campaign. Invest to Grow aims to inspire and inform businesses around investment in R&D, innovation, technology and machinery and how it can help boost productivity through case studies, expert opinion pieces and briefing information. Click here to find out more and don’t forget to join the conversation on social media with #I2G18. Part 1 of Invest to Grow focuses on investment in innovation and research & development and is sponsored by the University of Birmingham.

Over the years we have frequently come across situations where companies have either underclaimed their R&D or failed to recognise that they were even eligible for relief. So where have companies been missing out?

  • A component manufacturer had not appreciated that their process and tooling development costs could be eligible. The resulting claim covered the cost of the prototype tooling.
  • A developer of equipment had not considered that their initially developed machinery was effectively prototypes and consequently the development effort could be eligible.
  • A manufacturer of investment cast components had not recognised the link between product and process development would increase the overall percentage of eligible activity.
  • A product developer was not aware that their new prototype/ development facility could be eligible for 100% first year capital deduction due to its R&D use.

R&D that is eligible for UK Tax relief is based on a much wider definition than might traditionally be thought of as R&D.  It can occur wherever there is a technical problem without a readily deducible solution. This can be product development related, process development, process improvement or even overcoming a recurring failure in a manufacturing process. Understanding how the various stages in effective product development contribute to the overall project is key in identifying all of the activities that are necessary to deliver a new or appreciably improved product.

For simplicity we’ll talk about developing a new product but it’s worth remembering that this is equally applicable to making appreciable improvements to existing products. As a new product the chances are that it will aim to be appreciably better than previous or similar products or to offer something entirely new. What constitutes ‘better’ is a separate discussion. Having defined your aspirational performance requirements, it’s time to work on the question of how this can be achieved and to establish whether it will be feasible to manufacture the new product or component reliably and cost effectively. At this stage there may be a number of potential solutions but it may not be clear which would be the most successful and so the R&D department embarks on work to compare the effectiveness of the potential solutions. Work to compare these would qualify as research and development for tax purposes.

At this stage the project it’s time to investigate how to turn the concept into reality, evaluating the potentially feasible solutions against some key metrics. So what could be involved in this and typically what questions might need answering?

  1. Do the solutions push the capabilities of materials or construction methods and is there confidence that these will be successful?
  2. Will the solutions push the capabilities of existing manufacturing techniques or processes and is there confidence that these will be successful?
  3. Is the existing tooling and equipment suitable for achieving the required specification, ie tolerancing (dimensional and geometrical) or, perhaps, achievable surface finish both in terms of roughness and colour consistency?

Answering these questions will probably involve prototyping of both the product and the process, either in whole or in part, and may even require multiple iterations to understand and resolve recurring failures of the new product to meet the detailed specification. As there is an inherent link between product and process development it is inevitable that understanding these failures will also impact on development of the process and any new tooling. All the activities that contribute directly to resolving the technological uncertainties in developing the prototype(s) are eligible as R&D.

Being able to produce single or multiple prototypes doesn’t guarantee that commercial scale manufacture will be successful. Indeed, a period of pilot or trial manufacture may be necessary to identify and resolve underlying pervasive failure modes within the manufacturing process. Consider the impact of stack tolerances in manufacture of an assembly where it is typically technologically uncertain which tolerances within the entire assembly need to be tightened in order to achieve the overall tolerance. To resolve this it may be necessary to undertake a series of trials to support and validate the on-going development work and to explore the process capabilities, Cp, of successive iterations of prototype tooling. Understanding process capability and working to improve it can be eligible R&D.

As you can see from this overview eligible R&D can occur at any stage in the product development process and isn’t necessarily restricted to product design but may extend through into developing tooling and processes, trial manufacture or even troubleshooting problems within a live manufacturing process.

About R&D Tax North West

R&D Tax North West are experienced specialists in preparing and reviewing claims for tax relief for qualifying research and development activities. We are proud to support a varied client base with their R&D claims, ranging from multinationals through to micro businesses, in industries as diverse as web development and software through to precision manufacture and heavy engineering. As Chartered Engineers we believe that our broad engineering and project management experience across a wide range of industries makes us uniquely placed to grasp instinctively the technological challenges faced by our clients and to prepare thorough claim submissions.

Nick Biden
R&D Tax North West