Automotive Industry R&D Tax Credit
Raceway Engineering (Raceway) is an automotive company that specializes in building engines for off-road speedway sprint cars.
To stay at the top of the market, Raceway is always conducting R&D work to assist in the creation of innovative ideas and products. Raceway decided it wanted to come up with a new modified version of its V8 super engine to use in its first futuristic car. The new engine would be based on the company’s previous engine, with updates and improvements.
Raceway launched an R&D project with the following hypothesis:
“The V8 super engine can be improved in terms of performance and fuel economy, while meeting safety regulations and outperforming competitors’ engines.”
Raceway needed to determine the eligibility of its proposed R&D activities in order to know if they qualified 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
Raceway’s Eligible R&D Activities:
Design and development of a series of prototypes to achieve the technical objectives and prove the hypothesis (design of the modifications to the V8 super engine).
The hypothesis for this activity stated that it was feasible to design an improved and highly functioning V8 super engine that could outperform its competitors.
To try and prove the hypothesis, Raceway designed and redesigned multiple methods and engine parts during this phase.
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard (prototype development and testing of the V8 super engine).
Raceway’s hypothesis stated that the theoretical conclusions from the design phase could be realized through comprehensive and valid testing.
Raceway trialed the engine in a workshop environment and in the field to test for functionality, efficiency, accuracy and safety.
Background research to evaluate current knowledge gaps and determine feasibility (background research for the modification of the V8 engine).
Raceway conducted the following experiments during its research phase:
- Literature search and review, including maintaining awareness of changing legislation in the different states and zones
- 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 experts to determine the factors they considered important in the design and to gain an understanding of how the design needed to be structured accordingly
Ongoing analysis of customer or user feedback to improve the prototype design (feedback R&D of the modifications of the V8 engine).
Raceway’s eligible R&D work during this phase of experimentation included:
- Ongoing analysis and testing to improve the efficiency and safety of the project.
- Ongoing development and modification to interpret the experimental results and draw conclusions that served as starting points for the development of new hypotheses.
- Commercial analysis and functionality review.
The feedback was imperative to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design.
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 DEFINITION
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 Raceway keep?
Similar to any tax credit or deduction, Raceway 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. Raceway saved the following documentation:
- Literature review
- Meeting notes
- Screen shots
- Test protocols
- Test results and analysis
- Customer feedback
- Field-test results
By having these records on file, Raceway confirmed that it was “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.