Last week we busted the popular misconception that all innovative activities are eligible for the R&D tax incentive – instead explaining that eligible activities must be experimental and that their outcome can’t be known in advance. The next hurdle to meet is that the outcome must only be able to be determined by a scientific, systematic progression of work.
Does that mean that the R&D incentive is just for lab coat wearing scientists, and not a realistic prospect for most businesses?
The reality is that your R&D activities probably already follow this progression of work without you thinking about it – but adopting scientific terminology you’re more likely to be able to demonstrate your R&D eligibility. This is one of the reasons that our senior R&D team at Azure Group includes scientists as well as accountants!
#2 THE OUTCOMES THAT CAN'T BE KNOWN IN ADVANCE MUST BE DETERMINED BY SCIENTIFIC, SYSTEMATIC PROGRESSION OF WORK
From the legislation, a systematic progression of work proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions.
The importance of a well-developed and clearly written hypothesis should not be understated, as it describes the “unknowable” outcome we discussed in last week’s blog and drives how your experiments will be conducted. A well-developed hypothesis is not framed in terms of any commercial or economic aims, but rather to communicate what you are seeking to investigate through experimentation to provide a solution to the technical unknown or difficulty. This process involves demonstrating the cause-and-effect relationships between relevant variables.
Sounding too technical?
As an example of what this looks like in a real R&D application below is a [heavily redacted!] example that our senior R&D team have prepared:
“It is hypothesised that by combining [chemical structures] in certain quantities and ratios, a realistic, heterogeneous [product] will be created. During [chemical process], these combinations of [chemical structures] will react with other [external stimuli] to produce [human sensory effects] better than those by [existing products]”
In the above example, the hypothesis is devised such that it can not only can be proven or disproven by an experimental process, but also outlines what is being tested and the subsequent desired outcomes of the experiments if they are successful. The hypothesis informs the design of the experiment by describing the variables and how these will in turn react to external stimuli.
By contrast, an example of an insufficient hypothesis is:
“Whether particular computer software can be developed to include the latest research from the planning community.”
The above lacks detail, but also does not provide a direction for experimentation, an objective that can be disproven through experimentation, or description of the relevant variables investigated used in the experiment.
Once a focused hypothesis has been identified, the remaining elements of what makes a systematic progression of work will flow naturally and indeed are the only progression that makes economic sense. Following the hypothesis is the experimental activity – which is a process designed to test the hypothesis. These experiments can take place in virtually any environment – from laboratories to manufacturing plants, to offices, farms and greenhouses. Embrace the failures of your experiments as well as the successes, and never discard the results. Failed experiments, properly observed, evaluated and recorded – can be improved and repeated.
By the end of your R&D journey you will be able to tell the story of your development process from hypothesis to conclusion, and failed experiments are just as eligible for the R&D incentive as successful ones.
Look out for our post next week as we look closer at the next test for R&D eligibility – that the experimental activities must be conducted for the purpose of generating new knowledge. It’s closely related to the concept of a scientific progression of work – and should help explain why improvements you discovered by ordinary testing of your products aren’t eligible for R&D incentives (even if you think they should be). Keep your eyes peeled for Blog #3 to #5 and follow us on our socials.
Why are we talking about it for the whole month of October?
Well we think it's important to demystify R&D and explain why now more than ever a careful focus on eligibility is key.
Over the month of October, we are exploring 5 misconceptions in a series of blogs, leaving you with a downloadable booklet to keep on hand when you are exploring R&D. We plan to dive deeper into satisfying the different eligibility tests from this legislation using real-world examples to cut though the fog of confusion the market is having on eligible businesses.
Keep your eyes peeled for Blog #3 to #5 and follow us on our socials.