Oil Drilling Industry R&D Tax Credit
BGS’s Eligible R&D Activities:
This case study shows the application of key legislative requirements for qualifying R&D activities as they apply to relevant activities in the oil and gas industry.
Burrow Geoscience Solutions (BGS) is an innovative geoscience company offering a diverse range of products and services to the global oil and gas industry. In particular, BGS has developed a new range of software that assists clients in the exploration process by utilizing seismic data processing, imaging and interpretation.
Since BGS’s inception in 2003, the firm has matured with research and development (R&D) underlining the core of the company’s business activities. BGS’s projects began with the main objective to develop a processing and imaging toolkit for small-scaling processing. The team soon realised that the interpretation software tools existing on the market were inconvenient and out-dated; this ultimately led to BGS’s creation of a unique suite of cutting-edge software.
BGS constantly conducted R&D over the years to create new and improved products to perform to the best of its ability. In the past few years, BGS has augmented to include illumination studies, petrophysics, seismic data processing, depth imaging, geostatistical depth conversion, quantitative interpretation and multi-client studies. Currently, BGS’s services span the entire exploration and production lifecycle.
In order to qualify 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
BGS’s qualified R&D activities included the following.
BGS’s Eligible R&D Activities:
Design and development of a series of prototypes to achieve the technical objectives (design of an interpretation software). BGS’s hypothesis for this activity questioned whether a software could be designed and developed to assist in the exploration process.
The experiments BGS conducted in the design phase predominantly entailed computer modelling, conceptual
engineering drawings and mathematical calculations. These experiments could only be proven effective or ineffective in the prototype development and testing phase. Following the experiments in that phase, during which the product was built and tested in various applications, the design was modified and re-tested until the desired outcome was achieved.
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard (development and
testing of software).
The main objective for this activity stated that with improved knowledge of the intrinsic factors related to the extraction of oil and gas, it was possible to identify mechanisms for improving for the seismic data processing, imaging and interpretation.
Details of this experiment included development of the enhancers based on information gained through the model
and testing of the enhancers to ensure efficiency, accuracy and safety.
Background research to evaluate current knowledge gaps and determine feasibility (background research of the
development of BGS’s products).
Prior to 2003, the interpretation software tools existing on the market were cumbersome and obsolete. Thus, besides the lack of comparable solutions available, the outcomes of activities in this research could not have been known or determined in advance due to a number of specific technical challenges.
BGS’s eligible R&D activities during this phase of experimentation included:
- Literature search and review, including maintaining up-to date knowledge on relevant certification and standards.
- Consultation with industry professionals and potential customers to determine the level of interest and commercial feasibility of the product.
- 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 background research conducted by BGS was directly related to the main objective of designing interpretation software, therefore qualifying as R&D.
Ongoing analysis of customer or user feedback to improve the prototype design (feedback R&D of the interpretation
BGS’s eligible R&D activity for this phase of its project 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.
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 as R&D.
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 BGS keep?
Similar to any tax credit or deduction, BGS 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. BGS saved the following documentation:
- Project records/ lab notes
- Innovation Log
- Conceptual sketches
- Design drawings
- Literature review
- Background research
- Records of changes and bug fixes
- Testing protocols
- Results of records of analysis from testing/trial runs
- Records of resource allocation/usage logs
- Staff time sheets
- Tax invoices
- Patent application number
By having these records on file, BGS 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.