R&D tax relief: why innovation may be happening where businesses least expect it

Research and Development tax relief is often associated with major innovation, new products or highly specialised scientific research. That assumption can lead businesses to dismiss the relief altogether without considering whether the everyday technical challenges they are solving could potentially qualify.

In reality, innovation is not always so obvious, and many of the businesses that qualify for R&D tax relief do not see themselves as traditional innovators.

Across sectors such as construction, manufacturing, engineering, renewables, agriculture, architecture and professional services for example, companies are regularly solving technical challenges, adapting processes and developing new approaches which may involve qualifying R&D activity.

At Old Mill, this is one of the most common misconceptions the team encounters.

One of the biggest misunderstandings around R&D tax relief is the belief that businesses must be creating something entirely new to the market.

That is not the test.

In many cases, qualifying activity involves attempting to achieve an advance within a particular field by resolving scientific or technological uncertainty.

Importantly, businesses do not need to succeed for work to qualify.

Projects that fail commercially or technically may still meet the criteria if genuine uncertainty existed and competent professionals in the field could not readily work out the solution at the outset.

This is where many businesses unintentionally overlook qualifying work.

Some sectors consistently underestimate their R&D activity.

Construction and engineering

Construction businesses may be developing new methods to overcome complex project challenges, improve structural performance, adapt materials or meet environmental requirements.

Engineering firms frequently undertake in-depth problem-solving where standard solutions do not exist.

This can include:

• specialist fabrication
• structural redesign
• process optimisation
• performance improvements
• overcoming technical limitations on projects

Many businesses see this simply as “part of the job” rather than innovation.

Manufacturing

Manufacturing businesses are often heavily involved in qualifying activity without realising it.

Projects involving automation, production efficiency, waste reduction, product redesign, sustainability improvements or adapting machinery can all potentially involve technological uncertainty.

Even seemingly incremental improvements may qualify where businesses are attempting to resolve technical challenges beyond existing knowledge or capability within the business.

Agriculture and renewables

Agricultural businesses are increasingly undertaking technically complex projects, particularly around environmental management, sustainability, energy efficiency and production methods.

Renewables projects can also involve significant qualifying activity, especially where businesses are adapting systems, improving performance or integrating technologies in ways that are not straightforward or established.

Architecture and design

Architectural and design-led businesses often assume they fall outside the scope of R&D relief because they are not “scientific” businesses.

However, projects involving complex environmental performance, unusual structural requirements, sustainability targets or technically challenging site conditions may potentially qualify.

Again, the key question is whether technological uncertainty existed, not whether the business views itself as innovative in the traditional sense.

Even some professional services businesses may undertake qualifying activity.

This is particularly relevant where firms are developing proprietary systems, automating technical processes, building platforms or solving technological problems internally.

The fact that a business operates within a service sector does not automatically prevent qualifying activity from existing.

Another major misconception is that only successful innovation qualifies for relief.

In reality, qualifying R&D activity is measured by the attempt to overcome scientific or technological uncertainty, rather than whether the project achieves the intended outcome.

The tax legislation focuses on the attempt to achieve an advance and resolve uncertainty, not on commercial success.

This is particularly important in sectors where experimentation, testing and redesign form part of day-to-day operations.

There are several indicators that businesses may potentially be carrying out qualifying R&D activity.

For example:

• developing advanced solutions where no obvious answer exists
• overcoming repeated technical failures or design issues
• adapting systems or processes beyond standard practice
• investing heavily in testing, redesign or prototyping
• solving performance, environmental or efficiency challenges
• integrating technologies in new ways

In many cases, businesses simply see this as problem-solving or operational improvement rather than innovation.

In addition to excluding unsuccessful projects, a number of factors limit claims.

Some assume they are “too small” to qualify. Others believe the work must involve major inventions or highly specialised research projects.

In many cases, businesses are simply too close to the technical work itself. What feels routine internally may actually involve significant technological advancement when viewed against the legislative criteria.

There is also a tendency for businesses to focus only on finished products rather than the development process behind them.

Identifying qualifying activity early is increasingly important.

R&D tax relief claims are subject to greater scrutiny from HMRC, and businesses need to be able to clearly explain:

• the uncertainty involved
• the advance being sought
• the work undertaken to resolve the challenge
• why the solution was not readily achievable

That makes good documentation and early identification increasingly valuable.

R&D tax relief is often still viewed as something reserved for technology businesses and specialist innovators.

In reality, innovation is taking place across a far broader range of sectors particularly as businesses respond to environmental pressures, automation, sustainability requirements and changing customer demands.

For many businesses, R&D tax relief is less about starting something new and more about properly identifying what is already happening. Where technical and problem-solving exist, there may be an opportunity that has simply gone unnoticed.

Old Mill’s R&D specialists work with businesses across a wide range of sectors to help identify qualifying activity and support robust claims.

If your business is solving technical challenges, developing new processes or overcoming uncertainty, it may be worth reviewing whether R&D tax relief could apply.

Please speak to Aisha Perrott, Stephen Martin or your usual Old Mill adviser.