Natural Medicine Industry R&D Tax Credit
Natural Glow produces quality organic skincare made of the purest ingredients direct from distillers and growers around the world. The company continuously improves its existing ingredients through researching new filtration methods and extraction processes for aromatherapy and skin care. The company uses base ingredients as well as aromatherapy oils to ensure the therapeutic value, safety for use and appeal to users.
Due to the nature of its work, Natural Glow constantly performs R&D activities. For this particular project, Natural Glow believed that new products could be developed by reformulating existing ingredients on the condition that sufficient research and testing was performed to ensure that the products were safe for human use while meeting all the appropriate expectations.
Natural Glow needed to determine the eligibility of its proposed R&D activities in order to know if they qualified for R&D Tax Relief Schemes for the natural medicine industry. 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
After self-assessing, Natural Glow declared the following experiments as R&D work.
Natural Glow’s Eligible R&D Activities:
Design and development of a series of prototypes to achieve the technical objectives (design and development of the new product range).
The hypothesis for this experiment stated that designing, testing and evaluating various concepts would contribute to a more efficient and effective prototype testing phase.
Natural Glow conducted multiple experiments to try and create top-of-the-line products. It then concluded that such a design was feasible, but needed to be prototyped and fully tested to prove the hypothesis.
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 the new product range).
Natural Glow’s hypothesis for this phase of experimentation was that developing and implementing various designed components would allow refinement and tweaking of the final result to achieve the objectives of the project.
Natural Glow’s testing proved that the theoretical conclusions from the design phase could be realized through prototype development and related tests. The new knowledge generated would be used for further iterations of design and development and further field testing.
Background research to evaluate current knowledge gaps and determine feasibility (background research for the new product range).
Natural Glow’s background research included:
- Literature search and review.
- Field trips to India and Greece to locate, source and conduct preliminary testing of potential ingredients; to analyze competitors.
- Analysis of consumer behavior and wants (i.e. anti-aging).
- 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.
The activities conducted in the background research were necessary because they assisted in identifying the key elements of the research project, therefore qualifying as R&D.
Ongoing analysis of customer or user feedback to improve the prototype design (feedback R&D of the new product range).
Natural Glows’ qualified R&D activity 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.
- Consumer trials and feedback.
- Industry evaluations.
These activities were necessary to evaluate the performance capabilities of the new design in the field and to improve any flaws.
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 Natural Glow keep?
Similar to any tax credit or deduction, Natural Glow had to save documents that outlined what it did in its R&D activities, including experimental activities and business records to prove that the work took place in a systematic manner.
Unfortunately, the only records that Natural Glow saved were literature reviews and background research.
As a company claiming R&D, you always want 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.
Here are some types of documentation that would be beneficial to save:
- Project records/ lab notes
- Photographs/ videos of various stages of build/ assembly/ testing
- Testing protocols
- Results or records of analysis from testing/ trial runs
- Tax invoices
- Patent application number
- Meeting notes or progress reports