When the R&D legislation was introduced the starting point for the definition of R&D for income tax purposes was set as the definition contained in Statement of Standard Accounting Practice (SSAP) 13. SSAP 13 distinguishes R&D activity from non-R&D activity by the presence or absence of an appreciable element of innovation.

Ineligible activities per SSAP 13

Paragraph 7 of SSAP 13 lists the following activities as not meeting the definition of R&D activity.

• testing analysis either of equipment or product for the purposes of quality or quantity control;
• periodic alterations to existing products, services or processes even though these may represent some improvement;
• operational research not tied to specific research and development activity;
• cost of corrective action in connection with break-downs during commercial production;
• legal and administrative work in connection with patent applications, records and litigation and the sale or licensing of patents;
• activity, including design and construction engineering, relating to the construction, relocation, rearrangement or start-up of facilities or equipment other than facilities or equipment whose sole use is for a particular research and development project;
• market research.

Activities that do not qualify for R&D tax relief

Guidelines have been issued by the Secretary of State for Trade and Industry provide a definition of R&D for tax purposes. These guidelines were first issued on July 28, 2000 to take effect from that date. On March 5, 2004 they were replaced by new guidelines. All references refer to the new guidelines, unless specifically identified as old guideline references.

The Guidelines divide R&D into directly contributing activities and indirect activities. Only activities that directly contribute to the resolution of scientific or technological uncertainty in the pursuit of an advance in science or technology qualify for the R&D Tax Credit Relief. Therefore, any indirect activity will not qualify for relief.

Paragraph 28 of Department of Trade and Industry (“DTI”) Guidelines lists the following activities that are considered to be indirect activities:

• the range of commercial and financial steps necessary for innovation and for the successful development and marketing of a new or appreciably improved process, material, device, product or service;
• work to develop non-scientific or non-technological aspects of a new or appreciably improved process, material, device, product or service;
• the production and distribution of goods and services;
• administration and other supporting services;
• general support services (such as transportation, storage, cleaning, repair, maintenance and security); and
• qualifying indirect activities (activities qualifying under SSAP 13 but not eligible for R&D Tax Credit relief)

Qualifying indirect activities are described in paragraph 31 of the 2004 DTI guidelines.

These activities include:

• scientific and technical information services, insofar as they are conducted for the purpose of R&D support (such as the preparation of the original report of R&D findings);
• indirect supporting activities such as maintenance, security, administration and clerical activities, and finance and personnel activities, insofar as undertaken for R&D;
• ancillary activities essential to the undertaking of R&D (e.g. taking on and paying staff, leasing laboratories and maintaining research and development equipment including computers used for R&D purposes);
• training required to directly support an R&D project;
• research by students and researchers carried out at universities;
• research (including related data collection) to devise new scientific or technological testing, survey, or sampling methods, where this research is not R&D in its own right; and
• feasibility studies to inform the strategic direction of a specific R&D activity.