Project Description

Business Scenario

Wino Incorporated (Wino) is a specialist in the field of wine cellar refrigeration. In 2012, Wino was approached by a vineyard to create a solution that would allow them to reduce their operating cellar temperatures from about 59℉ to about 54℉.

A  solution was devised to use the cold liquid CO2  from a CO2 recovery plant by vaporizing  the  liquid  and  processing  it  through  the  cooling  units  in  the  cellar  to  lower  cellar temperatures  to 54℉.

To qualify 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:

  • Project
  • Advance in science or technology
  • science
  • technology
  • directly contribute
  • scientific or technological uncertainty

Wino’s Eligible R&D Activities:

Design and development of a series of prototypes to achieve the technical objectives and prove the hypothesis (design development and initial testing of the solution to reduce cellar temperatures via a C02 system).

The hypothesis for this phase of Wino’s R&D project questioned whether cellar temperatures could be reduced by 5℉ through the use of C02.

At an attempt to prove its hypothesis, Wino conducted the following R&D activities:

  • Practical design by in-depth analysis of possible issues
  • System design  was  constantly  refined  over  a  period  of  months  to improve  system  performance
  • Technical drawings and design calculations were updated as required to incorporate modifications and refinements
  • Implementation of solution onsite for testing and further development

Wino proved that the system was a failure as too many variables which were beyond its control did not allow the system to operate in a consistent manner. With all these factors influencing performance, the system was too complicated for stable operation of the cellars.

Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard and to test the hypothesis (testing and assessment of the practical performance revised solution).

Although Wino was unsuccessful in finding a solution to lower the overall temperature in the wine cellar, it was still able to claim the following tests and assessment activities as R&D:

  • A complete change in design was necessary using CO2 as a conventional refrigerant to reduce the cellar temperature.
  • Redesign of  the  system  as  a  standalone  plant  using  two  new compressors  and  pump  recirculation  of  liquid  CO2  to  larger evaporators in the cellars.
  • A new evaporator in each cellar was added to the existing evaporators.

Background research to evaluate current knowledge gaps and determine feasibility (background research for the design of a solution to reduce the cellar temperatures).

Wino’s background research was focused on identifying issues, design of a potential solution using C02 recovery tanks and liaising with the client for design development.

Design development included:

  • Client meetings, submission  of  typical  designs,  other  system  options  and  the undertaking to provide refined designs.
  • Internal design development and the development of sketches and calculations.
  • Discussions with the site operators on system practicality.
  • Design submission to the client for their review and acceptance.

These background research activities were necessary 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 the solution to reduce cellar temperatures via a CO2 system).

Wino conducted the following activities during its analysis:

  • Development and modification to interpret the experimental results/observations, and draw conclusions that served as starting points for the development of new hypotheses; i.e. solutions to observed inefficiencies or problems
  • Assessment of client feedback to improve on design of system
  • Client inspection on completion of construction stage
  • Validation of the design inputs on operation and testing of the new system

These activities were necessary to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design.

Commentary

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.

  1. Project
  2. Advance in science or technology
  3. Science
  4. Technology
  5. Directly contribute
  6. Scientific or technological uncertainty

What records and specific documentation did Wino keep?

Similar to any tax credit or deduction, Wino 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.

Wino saved the following documentation:

  • Progress of project (e.g. meeting notes, minutes, emails, reports)
  • Conceptual sketches and technical drawings
  • Photographs of completed models
  • Testing protocols
  • Results or records of analysis from testing / trial runs
  • Tax invoices

By having these records on file, Wino 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.