The Abortive-Projects Rule Surprises Almost Everyone and Makes a Great Counterintuitive Hook.
A failed R&D project or abandoned project may still contain qualifying research and development activities. This is often overlooked because businesses naturally focus on projects that reached completion or delivered a successful commercial outcome. However, R&D tax relief is concerned with the scientific or technological advance sought and the work undertaken to resolve uncertainty, not simply whether the project succeeded.
What Is the Abortive-Projects Rule?
Paragraph 10 of the Department for Science, Innovation and Technology (DSIT) Guidelines states that R&D can still take place where the advance in science or technology sought by a project is not achieved or is not fully realised.
A project may therefore fail, be discontinued or deliver less improvement than intended and still include qualifying R&D. The key question is whether the project sought an advance in overall scientific or technological knowledge or capability and whether work was undertaken to resolve scientific or technological uncertainty.
What Does Example C Show?
Example C in the DSIT guidelines provides two unsuccessful outcomes.
The first concerns an attempt to insert a particular gene into a gene sequence which fails. The second concerns a project seeking an appreciable increase in battery life that achieves only a marginal improvement. In both cases, work undertaken to resolve the relevant scientific or technological uncertainty would be R&D because each project sought an advance in science or technology.
An unsuccessful outcome does not change the nature of qualifying work already undertaken. A failed project typically showcases the attempted solution was not readily deducible and a genuine uncertainty, as if a competent professional could resolve / develop a complete solution first time, this would not qualify for R&D.
When Will a Failed Project Not Qualify?
Failure alone is not enough.
A project does not qualify simply because it exceeded its budget, failed to generate revenue or was not commercially successful. It must still seek an advance in science or technology through the resolution of scientific or technological uncertainty.
The advance must extend beyond the company’s own knowledge or capability. The uncertainty must also be one that could not readily be resolved by a competent professional working in the relevant field.
Only activities that directly contribute to achieving the advance through the resolution of scientific or technological uncertainty, together with the qualifying indirect activities listed in the DSIT guidelines, are R&D for tax purposes.
What Evidence Should Businesses Keep?
Businesses should retain evidence showing the uncertainties encountered and the work undertaken to address them. This may include failed test results, prototype records, technical reports, software development records, images and documents explaining why the project was stopped. Evidence of unsuccessful work may help demonstrate that the solution was not readily deducible at the outset.
Talk to an R&D Tax Specialist Today
Businesses should review unsuccessful and abandoned projects as carefully as successful ones.
Your project may have failed, but the qualifying R&D undertaken in attempting to achieve the advance may still support a claim.
To discuss whether an unsuccessful or abandoned project contains qualifying R&D, contact the Streets innovation team.
