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The legislation defines research and development (R&D) as activities that fall to be treated as R&D in accordance with generally accepted accounting practice. The accounting definition is included in FRS 102 (or IAS 38 for international GAAP). This definition was modified by guidelines issued by the Secretary of State for Trade and Industry on 5 March 2004.
See Guidelines on the Meaning of Research and Development for Tax Purposes.
FRS 102 defines ‘research’ as ‘original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding’. ‘Development activity’ is defined as ‘the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use’. FRS 102 also distinguishes research activity from development activity by the test of whether or not an entity can demonstrate that an intangible asset exists that will generate probable future economic benefits (section 18.8E). IAS 38 takes a similar approach in defining the activities and distinguishing between them.
The definition in FRS 102 is not considered to be precise enough for tax purposes and so the guidelines state that:
R&D for tax purposes takes place whe
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