Technological uncertainty exists when it is not readily known whether a technological objective can be achieved, or how it can be achieved in practice.
For R&D Tax Credit purposes, the important question is not whether the business itself knows how to solve a particular problem. The uncertainty must be one that could not be readily resolved by a competent professional working in the relevant field of science or technology using the existing knowledge and capability available to them. This means that technological uncertainty is different from a project being difficult or technically complex.
A business may encounter significant technical challenges when developing a new product, process or system, but if a competent professional could readily workout how to overcome them using established knowledge and techniques, they would not amount to technological uncertainty for R&D Tax Credit purposes.
Technological uncertainty does not necessarily mean that no one knows whether something is possible. The uncertainty may instead concern how a technologically feasible outcome can actually be achieved in practice, including how it can be made sufficiently reliable, reproducible or effective for its intended purpose.
Technological uncertainty is important because its resolution is a fundamental part of what constitutes R&D for tax purposes.
For a project to contain qualifying R&D, it must be seeking an advance in science or technology and involve work that directly contributes to achieving that advance through the resolution of scientific or technological uncertainty.
This means that identifying a technological advance is only part of the assessment. It is also necessary to establish what technological uncertainties stood in the way of achieving that advance and what work was undertaken to resolve them.
When considering whether a project involves qualifying R&D, the starting point should always be the Department for Science, Innovation and Technology (DSIT) Guidelines on the Meaning of Research and Development for Tax Purposes.
The Guidelines provide the definition of R&D used for tax purposes and form the basis on which HMRC determines whether particular activities qualify. They are therefore a key reference point when assessing a potential claim or responding to an HMRC enquiry.
The current Guidelines are based substantially on those first issued in March 2004, with the concepts of technological uncertainty, competent professional and “readily deducible” remaining despite updates in 2010 and 2023.
Under the Guidelines, the key test is whether the technological feasibility of an outcome, or how it can be achieved in practice, is readily deducible by a competent professional working in the field.
The Guidelines also recognise that technological uncertainty can arise even where something is already known to be technologically feasible, if there is uncertainty about how to turn it into a cost-effective, reliable and reproducible process, material, device, product or service.
In practice, this might include uncertainty about achieving the required scale, speed or level of performance.
Whether a solution is “readily deducible” is central to determining whether technological uncertainty exists.
The fact that a business does not know how to solve a technological problem is not enough. The question is whether a competent professional working in the relevant field could readily work out the solution using the knowledge and capability already available.
There is an important distinction between technology being known to exist and the knowledge required to reproduce it being publicly available. A competitor may already have achieved a particular technological advance, but this does not necessarily prevent another company carrying out qualifying R&D if the details of how it was achieved are not publicly available or readily deducible.
The Guidelines specifically recognise this where technology is protected as a trade secret, or an advance is known to have been achieved but the details of how are not readily available.
Conversely, a solution does not have to be publicly available in precisely the form required. If a competent professional could readily work it out from existing knowledge and established techniques, it may still be readily deducible.
There is no minimum period for which a technological uncertainty must exist before the work undertaken to resolve it can qualify as R&D.
However, the time and effort required can be relevant when considering whether a solution was “readily deducible” by a competent professional.
If a problem can be resolved quickly using existing knowledge and established techniques, this may indicate that it did not involve technological uncertainty.
However, a project does not qualify as R&D just because it took a long time or required considerable effort.
The question remains whether a competent professional could readily have worked out how to achieve the technological advance using the knowledge and capability already available in the field.
The term “competent professional” is not precisely defined in the DSIT Guidelines, although HMRC has published more detailed guidance on the knowledge, experience and expertise it expects them to have.
This does not necessarily require a particular academic qualification or job title,with practical experience and a successful track record also relevant.
Competence also needs to relate to the relevant field. Someone may be an experienced software developer, engineer or scientist without necessarily having sufficient expertise in the particular area of technology involved in the project.
A competent professional should be able to explain the existing state of knowledge in the field, the technological advance being sought, the uncertainties encountered and why the solution could not readily be deduced from existing knowledge.
Their professional judgement carries significant weight, although describing someone as a competent professional does not in itself establish that qualifying R&D has taken place.
In practice, the distinction between a technically challenging project and one involving technological uncertainty is not always straightforward. Two projects may involve similar technologies and substantial development work but have very different outcomes for R&D Tax Credit purposes, as the following examples illustrate.
A company develops a new software platform to replace several existing systems and to automate a range of business processes.
The project requires substantial software development, including database design,data migration and systems integration. Technical challenges arise, but these can be resolved using established programming methods and known integration techniques.
Although the project maybe technically demanding, a competent professional could readily determine how these particular challenges could be overcome using existing knowledge and techniques.
These challenges, on their own, would therefore be unlikely to amount to technological uncertainty for R&D Tax Credit purposes.
A company seeks to achieve an advance in technology by developing functionality that requires several existing technologies and systems to operate together in a way that cannot readily be achieved using established approaches.
The individual technologies are already known and the company knows the functionality it requires. However, a competent professional cannot readily determine how to produce the required result because of limitations in the existing technologies or the way the systems interact.
The development team investigates alternative architectures and adapts or extends existing technologies to determine how these limitations can be overcome.
If a competent professional could not readily determine how the advance could be achieved, these challenges may therefore amount to technological uncertainty for R&D Tax Credit purposes.
A project does not have to succeed for the work undertaken to qualify as R&D. The DSIT Guidelines recognise that R&D can still take place where a project seeking an advance in science or technology is unsuccessful.
An unsuccessful attempt may also be relevant when considering whether the solution was readily deducible, although failure does not in itself establish that qualifying R&D took place.
R&D ends when the technological uncertainty is resolved or work to resolve it ceases.
The DSIT Guidelines also state that R&D ends when the resulting knowledge has been codified in a form usable by a competent professional, or when a prototype or pilot plant with the functional characteristics of the final product,process or service has been produced.
The wider commercial project may continue beyond this point, but subsequent routine development, production or implementation will not qualify merely because it forms part of the same project.
Technological uncertainty arises where it is unclear whether something is technologically feasible, or what method or approach is required to achieve it in practice.
No. Qualifying R&D can seek to extend existing knowledge or capability or make an appreciable improvement to existing technology. The advance must be in the overall field of science or technology rather than only being new to the company undertaking the project.
No. Commercial, financial or business uncertainty does not amount to scientific or technological uncertainty. The uncertainty must relate to whether something is scientifically possible or technologically feasible, or how it can be achieved in practice.
The DSIT Guidelines specifically exclude the commercial and financial steps associated with developing and marketing a new or improved product or service from activities that directly contribute to resolving scientific or technological uncertainty.
Sometimes. A wider commercial project may contain qualifying R&D alongside routine development or other activities that do not contribute to resolving scientific or technological uncertainty. However, certain supporting activities may qualify as “qualifying indirect activities” where they meet the conditions set out in the DSIT Guidelines.
Yes. The DSIT Guidelines recognise that new scientific or technological uncertainties may emerge after a product, process or service has entered production or use. Work undertaken to resolve those new uncertainties may constitute further R&D, although routine fault fixing would not qualify.
Rufus Meakin is Senior Advisor and Brand Ambassador at RCK Partners. He has worked in R&D incentives and the wider innovation funding market for 25 years and regularly writes on R&D tax relief, innovation policy and HMRC compliance.
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