Companies wishing to claim R&D tax relief on production activities (undertaken with a view to producing goods or services for supply to customers) such as prototypes or consumables that are eventually commercialised or sold should be aware that HMRC has firmed up its position to consistently reject these claims.

After 8 years of accepting these types of claims, the view of HMRC changed towards the end of last year such that they now interpret the legislation in a very narrow way which rejects the idea that R&D can occur during commerical production. In other words, if the intent of performing certain activities was to produce goods or services for sale to a customer, these activities would not be claimable. This is radically at odds with the way that R&D during commercial production is treated in other jurisdictions such as the US and Canada, but given the large amounts at stake here, in the same way as the case law on this there was established through the courts, it seems inevitable that this approach will be challenged through the legal system here by some of the large multinational companies.

Although a survey last year from the Confederation of British Industry (CBI) on the R&D tax relief put overall satisfaction with the scheme as high as 80%, this was before HMRC implemented this major re-interpretation of the legislation, thereby precluding large numbers of claim.

While it is still possible to claim R&D tax relief for non-production activities in a production environment, companies should be aware that the standard response of HMRC in cases where they think production activities are being claimed for is to open an enquiry.

If you are in doubt as to whether or not your activities are likely to be challenged, then please contact us.