Scientific & Technological Baselines for R&D Tax Credit Claims

When it comes to R&D tax credits, one of the critical steps in preparing a successful claim is establishing a clear scientific or technological baseline. For Revenue, a well-documented baseline defines the starting point for an R&D project. This baseline not only frames the scope of work but also shows why a project was needed. Let’s explore what establishing a baseline involves and how it can strengthen R&D tax credit claims, with examples to illustrate the concept.

Understanding the Role of a Baseline in R&D Projects

An R&D project seeks to overcome scientific or technological uncertainties. These are questions that experts in the field could not readily answer using existing knowledge.

This is where establishing a baseline comes in. The baseline is essentially a snapshot of the current state of knowledge or technology before the R&D begins. It documents what is known, identifies limitations in current methods or technology, and sets up the challenge that the project aims to address. By clearly establishing a baseline, businesses can demonstrate to Revenue that their work goes beyond routine improvements and qualifies as R&D.

Why Establishing a Baseline Matters for Compliance

Establishing a clear baseline is essential for Revenue to confirm that a project genuinely aims to address an identified gap in current knowledge. Having no baseline makes it hard to justify the scientific or technological uncertainties, as well as why you even began the project. Any ambiguity may raise concerns if Revenue opens an R&D Aspect Query and could even lead to the rejection of claims if the project's qualifying nature is not clearly articulated.

The focus on the baseline isn’t intended to impose unnecessary barriers; rather, it ensures that the R&D credit supports authentic innovation. Qualifying R&D activities must contribute to advancements in science or technology. An advancement cannot be achieved without a baseline to jump from.

Example 1: A Baseline in Software Development for Automation

Consider a business developing a new machine-learning model that automates a manual analysis process. Suppose that before starting the R&D project, the industry-standard tools could only automate simple analyses with limited accuracy due to the specific complexities of the data.

Here, the baseline would include details of these limitations, referencing existing methods, and explaining why current models fall short. In this case, the baseline could include industry research showing that current solutions cannot process certain types of data accurately or efficiently enough to be valid.

For example:

The company researched the state of the art in machine learning models for this type of analysis. The company conducted industry research looking at competitor products and open-source information.

The company found limitations in the existing machine learning models, as the best-practice method could not handle the complexities of the company’s data.

We would expect to see specific examples of best-practice methods and their failures, as well as cited examples of research.

By presenting this baseline in an R&D tax credit claim, the business can demonstrate that its project intends to solve a genuine technological challenge rather than just fine-tuning existing tools.

Example 2: Establishing a Baseline in Pharmaceutical R&D

A pharmaceutical company aiming to develop a drug with fewer side effects might find that existing compounds only mitigate symptoms at the expense of significant adverse effects.

Here, the baseline would describe these existing compounds' efficacy and side-effect profiles, using clinical and academic literature to outline the known limitations.

For example:

The company investigated the efficacy and side-effect profiles of compounds X, Y and Z, testing through established clinical guidelines. The company also assessed academic literature, reviewing Journals A, B and C’s research into these compounds.

The company found that the compounds had excessively common side effects, such as swelling and lethargy and that efficacy was limited in phase III trials.

In this case, we would expect to see examples of the phase III trials and specific journal reviews.

Establishing this baseline helps justify the need for experimental research activities, which may include testing new compounds or molecular structures. It supports the project’s claim as it addresses an evident scientific uncertainty directly impacting patient health outcomes.

Documenting and Justifying Your Baseline

Establishing a baseline involves more than simply identifying the starting point of a project; it requires creating a logical and well-supported foundation that justifies the R&D work. This typically includes:

• Literature Reviews: A strong baseline should reference scientific literature, white papers, patents, or technical reports that outline the current limitations of existing technology or knowledge.
• Industry Standards and Benchmarks: If the R&D aims to address a limitation in an industry-standard process or product, referencing these standards can demonstrate that the R&D goes beyond what is currently possible.
• Competitor Comparisons: In some cases, direct comparisons to existing products and their capabilities may be helpful to demonstrate the state of the industry.
• Expert Insights: Statements or reports from technical experts can shed light on the inadequacies of existing methods and explain why certain experimental approaches are necessary to tackle the identified challenges.

By keeping a record of the baseline with the right sources, a business can put together a solid case that fits Revenue’s rules, which helps cut down on any compliance headaches.

The Impact of a Clear Baseline on Compliance

When Revenue reviews R&D claims, projects that do not clearly establish a baseline may be subject to a formal aspect query. This is particularly important in sectors like software development and pharmaceuticals, where the distinction between routine work and genuine R&D can be subtle.

For instance, if an IT company is claiming R&D tax credit for an improved algorithm, it must clearly outline the limitations of the current algorithm as the baseline and demonstrate how the new model advances upon it. If the baseline is ambiguous, Revenue may question whether the work has a qualifying advance, which could lead to delays or even rejection of the claim.

Conclusion

A well-defined, evidence-based baseline serves as the cornerstone for demonstrating a project's eligibility by clearly identifying the specific uncertainties it seeks to address and the advance it's seeking to make.

It’s important that companies get their project details clear, or risk spending valuable time and resources defending the claim at a later date.

At Myriad, we have been working on R&D tax claims for over 20 years and we know what’s a qualifying project. We also know how to explain a project to highlight its most innovative aspects. If you’re not sure if your advance is clear enough, or need some support explaining your baseline, get in touch with the team at Myriad.