Architecture R&D Tax Credit
Freeman Home Builders (Freeman) is a custom home construction company involved in designing, constructing and managing home builds from conception to delivery.
In 2012, Freeman identified that the inefficiencies that occurred during the building process were a result of poor industry practices, which were manual, resource-intensive and poorly organized.
Freeman saw a need for a new, all-encompassing software that could handle all aspects of its business instead of the existing market technology that focused strictly on design. Freeman formulated a hypothesis for its new R&D project:
“A management system can be designed and developed to manage all aspects of a building project by integrating the functions of design, customer relationship management (CRM) and accounting software.”
The company believed its new management software (FMS) could be eligible for R&D Tax Relief Schemes. It had to be certain that its qualified research met key legislative requirements within the tax definition to demonstrate the project is R&D. These requirements include defining for tax purposes:
- Advance in science or technology
- directly contribute
- scientific or technological uncertainty
Freeman’s Eligible R&D Activities:
Design and development of a series of prototypes to achieve the technical objectives (design of FMS).
This activity focused on whether a management system could be designed and developed to manage all aspects of a building project by integrating the functions of design, CRM and accounting software.
After cycles of coding, testing and re-coding, Freeman was able to prove the theoretical feasibility of developing FMS.
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard and to test the hypothesis (prototype development and testing of FMS).
The hypothesis for this experiment was to prove that theoretical conclusions from the design phase could be realized through the development and testing of FMS, and conclude that a management system could be designed and developed to manage all aspects of a building project by integrating the functions of design, CRM and accounting software.
Background research to evaluate current knowledge gaps and determine feasibility (background research for the design of FMS).
Freeman engaged in background research for three years which included the following activities:
- Literature search and review
- Consultation with industry professionals and potential customers to determine the level of interest and commercial feasibility of such a project
- Preliminary equipment and resources review with respect to capacity, performance and suitability for the project
- Consultation with key component/part/assembly suppliers to determine the factors they considered important in the design, and to gain an understanding of how the design needed to be structured accordingly
These activities qualified as R&D because they assisted in identifying the key elements of the research project.
Ongoing analysis of customer or user feedback to improve the prototype design (feedback R&D of FMS).
Freeman’s R&D work at this stage included activities such as prototype modifications, ongoing analysis and testing, continuous development and modification to interpret the experimental results, and drawing conclusions that served as starting points for the development of new hypotheses.
These activities were necessary to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design, therefore qualifying them as R&D work.
QUALIFIED RESEARCH DEFINED
Qualified R&D projects consists of research for the intent of achieving an advance in overall knowledge. Advances in capabilities in the field of science or technology through the resolution of scientific process or technological uncertainty general qualify as R&D project. The advancement but not simply be in its own state of knowledge or capability. A companies R&D project must relate to the trade of the business whether it be an existing product or process or one intend to start based on R&D outcomes.
QUALIFYING PROJECT WITHIN THE TAX DEFITION
Activities that are eligible for R&D Relief are defined in the Guidelines by the HMRC, which must be met for the project to qualify as R&D.
- Advance in science or technology
- Directly contribute
- Scientific or technological uncertainty
What records and specific documentation did Freeman keep?
Similar to any tax credit or deduction, Freeman had to save business records that outlined what it did in its R&D activities, including experimental activities and documents to prove that the work took place in a systematic manner. Freeman saved the following documentation:
- Error log and fixes
- Conceptual sketches
- Technical drawing revisions
- Screenshots of various build versions / final version
- Email correspondence
- Progress reports and meeting minutes
- Staff time sheets
- Tax invoices
- Patent application number
- Backup copies of the program and reports for each release
- Documentation of changes and source code in an online, private revision control system
This is an excellent example of how to be “compliance ready” — meaning if it was audited by the HMRC, it could present documentation to show the progression of its R&D work, ultimately proving its R&D eligibility.