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R&D Tax: What Can’t You Claim For?

If your company is innovating new products, methods or theories, you could be eligible for R&D tax credits. This generous government incentive backs companies doing research and development (R&D) by offering up to 30% of R&D costs back as a tax credit.

However, with compliance a hot button issue across R&D tax incentives internationally, it’s more important than ever to make sure your claim is as robust as possible.

R&D tax credits can be complicated, especially when it comes to what you can and can’t include in your claim. We break it down for you here.

To qualify for R&D tax credits, at a basic level, your project needs to seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty.

Scientific or technological advancement is when your company is developing a product, service, material or process which is an improvement of the state of the art. If you are extending the knowledge or capabilities of the field, you are likely to qualify!

Example A: A software company is seeking to develop a new algorithm that can handle large amounts of data in real time. They are looking to improve upon the existing speed of data handling by tripling the amount of data that can be handled in real time.

Example B: An engineering firm is seeking to develop a new piece of equipment in the manufacturing field that is more sustainable than its predecessor. They are looking to reduce the energy the machine requires to manufacture products by half.

Scientific or technological uncertainty means that it isn’t obvious to your team of experts if it’s physically possible to resolve a problem. Your team should’ve investigated the standard solutions and established that there is no obvious answer in the public domain.

Example A: The software company above cannot easily triple the data handling speed due to the constraints of the database and resources in the on-premises services it uses. It needs to find a novel way of handling the data through trial and error.

Example B: The engineering firm above cannot find an obvious solution in its literature review that can deliver the same output with less energy, due to the heavy loads of the machinery. It needs to develop new machinery based on lean principles.

With an advance and an uncertainty, you’re well on your way to qualifying. It’s important that your project is scientific or technological in nature, is well documented (in case Revenue opens an audit of the claim) and falls under the eligible types of research.

The guidelines are intentionally vague, so that they can apply to all kinds of research and development projects. But, essentially, work that is experimental and is directly contributing to advancing science or technology falls under the scope of the scheme.

The R&D credit can only be claimed on expenditure incurred “wholly and exclusively” in the “carrying on” of qualifying R&D activities. This means that the only costs you can claim are those that are directly relevant to achieving the advance of the project.

Since Revenue’s guidelines are deliberately loose, it’s sometimes easier to check if you can’t claim for a specific project or cost, rather than if you can!

Projects won’t be covered by the R&D tax credit scheme if they are in the following fields:

• Social Sciences (economics, business management, behavioural sciences)
• Arts
• Humanities

Additionally, R&D is unlikely (but not impossible!) to be found in the accommodation, catering, and wholesale industries.

Revenue has also specified the R&D activities which cannot be included in a R&D tax credit claim, whether they are done by staff, subcontractors or externally provided workers.

Ineligible research and development activity

• Routine testing and analysis for quality/quantity control
• Cosmetic and aesthetic modifications
• Operational research (like management studies or efficiency surveys), if they are not exclusively done for the R&D project
• Early-stage research, including market research, market testing, market development and consumer surveys

Administrative and commercial activity that cannot be included:

• Any legal or administrative work towards patent applications, sales or licences, records and litigation
• Commercial and marketing activity
• Administration and general support services not exclusively done for the R&D project, including
  • Transportation
  • Storage
  • Cleaning
  • Repair
  • Maintenance
  • Security
• Any activity related to facility management that is not exclusively for R&D (i.e., the facilities must be integral to the R&D such that the R&D could not be done without the facilities)
• Any work to fix breakdowns in the commercial production of the project (unless it results in a new scientific or technological uncertainty)

Costs that aren't directly related to the R&D work – like recruitment fees, insurance, travel, equipment repairs, shipping, business entertainment, phone bills, bank charges, and interest – won’t count as eligible expenses. Even if they indirectly impact the R&D, these costs are not incurred exclusively for R&D.

We touched on it above, but rent can only be claimed if it’s a specialised facility that is crucial to the R&D. For example, a laboratory or clean room might be essential to a research project being carried out properly, but an office space for the R&D team is not specialised to any project.

Lastly, companies cannot claim for prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas.

As you can only claim for work done in the “carrying on” of R&D, there must be clear boundaries for when R&D begins and ends.

R&D begins when a scientific or technological uncertainty is identified. This follows the period of investigation into the existing baseline of science and technology (i.e., after literature reviews, competitor analysis and research into the public domain). It is definitely after the commercial project has been given the green light and usually after the general project set up.

R&D ends when the scientific or technological uncertainty has been resolved. It may not be commercially perfect, with some bug fixes, aesthetic alterations or even whole additional modules to be completed, but the underlying feasibility has been proven.

In some cases, the team may be working on multiple R&D projects within a larger commercial project, with their own uncertainties and advancements. The company should identify each R&D project’s start and end dates and separate out costs per project.

Sometimes, following the end of an R&D project and in the course of further “standard” development, or even commercialisation, another uncertainty will arise. This project will have its own start and end dates.

Furthermore, where projects are abandoned, the end of the project will be on the decision to no longer work on the uncertainty.

Our online R&D tax credit portal is a guided option for innovative Irish companies to prepare their claims. Our team of experts reviews your projects and costs to ensure that you are submitting the best claim possible.

Tax Cloud comes with checks and balances built in, so you never risk making a dodgy claim. Use our timesheets function to make sure you’re accurately claiming your staff time across projects, without going over your project dates. Our cost and tax experts will review your costs so that only eligible expenditure is included. This level of safeguarding is important in the event of a R&D Tax Aspect Query by Revenue.

Find out how much R&D tax credits could be worth to your company by using our R&D tax calculator, or sign up now to get started on your claim.