“We don’t do much R&D.”
We hear this all the time from businesses we speak to. But when we get into what they’ve actually been working on, there’s often plenty happening that’s interesting from an R&D Tax Incentive perspective.
The disconnect often comes down to definitions. What do you actually classify as R&D?
R&D looks different in every business. Yes, some have dedicated R&D teams, clearly defined projects and specific R&D budgets. But for many businesses, R&D is woven into the day-to-day.
It’s product development. Engineering. Building and testing prototypes. Developing software. Improving processes. Working through technical challenges. Testing different approaches and iterating when things don’t work.
You might not call that R&D internally, but from an R&D Tax Incentive (RDTI) perspective, these are exactly the kinds of activities that can point to R&D taking place.
And if you’re underestimating the amount of R&D happening in your business, there’s a good chance you’re underestimating how much you’re investing in it too.
A few engineers or developers spending a meaningful amount of their time solving a technical problem can represent a significant investment over the course of a project. Add in other eligible project costs and supporting activities, and the potential R&D expenditure can build quickly.
With a 15% tax credit available on eligible R&D expenditure, the RDTI opportunity can be much more significant than you first thought.
How to Spot Eligible R&D in Your Business
When we speak to businesses about the work they’ve been doing, there are a few things we listen out for that can indicate potentially eligible R&D:
- Building and testing prototypes to see whether an idea or approach will actually work.
- Testing different approaches because the best method, material, configuration or technology isn’t clear.
- Solving technical or design uncertainties where there isn’t an obvious or readily available solution.
- Developing or improving products, processes or software, particularly where you’re pushing performance, capability, reliability or efficiency.
- Testing and iterating, using what you learn from one attempt to inform the next.
- Scaling something up, where moving from a prototype or small-scale solution introduces new technical uncertainties.
Doing these things doesn’t automatically mean a project qualifies for the RDTI. There are specific eligibility criteria that need to be met, which we cover in more detail in our guide to RDTI eligibility.
But they are strong indicators that some of the work you’re doing could be eligible, and worth a closer look.
The next question is: how much have you actually invested in these projects?
That’s where the opportunity can start to add up.
How Quickly Can R&D Expenditure Add Up?
Once you’ve identified potentially eligible R&D, the next question is how much you’ve actually invested in it.
The obvious place to start is your technical team. Engineers, developers and other technical staff spending a meaningful portion of their time on eligible R&D can quickly represent a significant cost.
Then there are the direct costs of doing the work, such as prototyping, materials, testing and specialist contractors.
There can also be less obvious eligible costs. Other staff may contribute to or support the R&D activities, while depreciation on assets used for R&D and relevant overheads can also form part of the picture.
Put it all together and the pool of eligible expenditure can build quickly.
Consider a 70-person manufacturing business with 12 technical staff across design, engineering and software, each earning an average salary of $120,000.
If those 12 people spend, on average, 50% of their time on eligible R&D across the year, that’s already around $720,000 in potential eligible salary costs.
Add supporting staff time, prototyping and materials, testing, contractors, depreciation and other eligible costs, and you can see how the business could break the $1 million mark in eligible R&D expenditure pretty quickly.
At a 15% tax credit, that’s $150,000 back into the business.
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So, How Much R&D Are You Actually Doing?
If your first reaction to the RDTI is “we don’t do much R&D”, it might be worth taking another look.
Think about the projects your teams have worked on over the past year. Where have they been developing something new or improved? Building and testing prototypes? Working through technical uncertainties? Trying different approaches? Testing, learning and iterating?
Then look at the investment sitting behind that work. How many people were involved? How much of their time did it take? What else did you spend to get the project done?
You might find there’s a lot more R&D happening in your business, and a much bigger RDTI opportunity, than you first thought.
Keen to get an estimate of how much R&D you’re doing? Get in touch with the Swell team for a no-obligation intro call. We’ll talk through what you’ve been working on and help you get a sense of what the opportunity could look like.