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16 NOV 2020

CLAIMING TAX RELIEF FOR FAILED R&D PROJECTS

Jenny Tragner of ForrestBrown explores how you can claim tax relief on unsuccessful projects.

The business world is filled with gurus advising companies to ‘fail fast’ or ‘fail better’. But business owners and decision-makers know failure comes with a price tag attached.

Yes, of course, innovation and risk-taking are important and failure is a reality in life let alone business, but funds are also limited (especially these days). There is, then, a balance that needs to be struck between innovating and investing your resources prudently.

R&D tax relief is a powerful way to maintain this delicate balance. The incentive is not solely aimed at rewarding successful projects. It can help lessen the financial sting of a failed project as well, making risk-taking and investment in innovation more sustainable.

Failed R&D is R&D

No ifs, buts or maybes about it: Failed R&D can unambiguously count as R&D for tax purposes. As the government’s guidelines clearly outlines:

Even if the advance in science or technology sought by a project is not achieved or not fully realised, R&D still takes place. Para. 10, Guidelines on the meaning of Research and Development for tax purposes

Not only is claiming for unsuccessful R&D allowed – it’s one of the pillars of R&D tax credits as a policy. Risk-taking sometimes means, as any entrepreneur or innovator knows, reckoning with failure. That’s precisely why R&D tax credits were set-up with this dual nature of risk in mind.

Remember: It’s possible to retrospectively file R&D tax credit claims with HMRC. You have two years from the end of your accounting period to submit one.

R&D tax relief for failed R&D projects

R&D tax credits aren’t just a reward for success. The incentive is intended to incentivise certain behaviours. And in business (as in life) failure should be viewed in a more nuanced way. Exploration and curiosity have value.

Indeed, unsuccessful R&D is perhaps where the transformative power of this incentive shines brightest. We often talk about a ‘culture of R&D’ at ForrestBrown. By lessening the risks attached to innovation, it becomes easier for that culture to take hold.

Be bolder, go that little bit further, allocate a bit more resource and then use R&D tax relief to support the cost of any failure. You may fall short, but those costs may be eligible for R&D tax relief.

Failed R&D project examples

One of the many perks of working in R&D tax credits is seeing amazing feats of ingenuity up close. It’s wonderful to share in the success of our clients – but, as we’ve already established in this article, failed R&D comes with the turf as well.

We frequently work with clients who have tried something brave, novel, unusual or just plain difficult and fell short of the desired outcome. For these clients, the benefit helps recoup some of the money spent on a failed project.

Here are a few examples of failed projects we’ve helped clients claim R&D tax credits for:

  • An AI research group
    This client researches and develops algorithms for use in different practical applications. In one specific case, the group worked on an algorithm and sensor array for autonomous vehicles that could be produced at a lower cost than the current technology and make more efficient use of computing resources to deliver rapid decisions.

    While the algorithm performed well in internal tests, it didn’t surpass existing technology in the automated car space when tested externally, so the project didn’t go any further.

    Benefit received: £60,674.

  • A machine tooling supplier
    This company attempted to create a special tool for the deep routing of industrial window frames. Despite several iterations, the tool developed still did not meet requirements, resulting in two batches of bespoke cutters having to be scrapped.

    The firm did, however, make some progress in its knowledge and design, and the project to design the tool carries on unabated. The money gained from its R&D tax credit claim will help fund this work.

    Benefit received: £33,960.

  • A mobile refrigeration supplier
    A change in legislation affected the availability of a HFC blend that is widely used in low and medium temperature refrigeration applications. In response, this company has started an ongoing project to develop a mobile refrigeration unit that can run using Propane R290 instead.

    Changing the nature of a refrigerant within a system is not a simple like-for-like replacement. This is because different coolants have different properties under various temperatures and pressures and will also possess different heat capacities.

    The project is on-going and has involved numerous iterations. R&D tax credits have helped offset the substantial project costs.

    Benefit received: £70,000.

Funding for failed R&D

In the simplest terms, R&D tax credits are a way to fund R&D projects and mitigate losses incurred by failed R&D projects. But at a deeper level, the incentive also encourages a behavioural switch.

Exploration and curiosity have value, and R&D tax credits can help you take bigger risks. Even if this attempt doesn’t pay off, it might spark another idea or lead you down a previously unexplored path.

By viewing failure not just as a cost, it becomes possible to view it as a point situated along a longer timeline. You’ve failed now, but armed with new knowledge, you can pick up where you left off and apply it in your next iteration or in a whole new project (that could be eligible for R&D tax credits as well).

We often find that our clients claim year-on-year.  Innovation begets more innovation. As you invest and reinvest in R&D, the dynamics and mindsets in your company will change too.

Who knows what the possibilities might be?

ACE affiliate ForrestBrown are experienced at working closely with businesses to use R&D tax credits to deal with the specific challenges they face. If you need strategic advice in turbulent times from a quality R&D tax credit adviser, contact them today.

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The UK’s largest specialist R&D tax credit consultancy, with a multi-disciplinary team of chartered tax advisers, engineering specialists and former HMRC inspectors, they're passionate about how R&D tax credits can help engineering businesses grow.

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Jenny Tragner

Jenny Tragner

Director

Jenny is responsible for in-house training and Forrest Brown's quality assurance process. She also takes the senior management lead on any HMRC enquiries they handle for clients.

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