In the SR&ED world, exhaustive systematic experimentation is usually the bread and butter. It takes up lots of claimable employee hours, and it uses up real-world resources that will never be commercially sold. Provided technological uncertainty can be established and great records are kept, you have yourself a claim.
But what happens when companies have high tech simulations available to them, allowing them to run through many more iterations without wasting potentially usable product? This sounds like a smart way to experiment when possible, something that should also be encouraged for ecological reasons in many cases. It would be a shame if the current setup of the SR&ED program unintentionally penalized simulated experimentation.
The short answer is “Yes, with conditions…”
Here’s the good news: like physical R&D, simulated experimentation can be claimed. And like physical R&D, the difference between claimable and not claimable hinges on that same notion of technological uncertainty.
- In some cases, the actual SR&ED eligible work does not happen in simulation–but the simulation makes possible an advancement discovered later in physical experimentation. This would make the simulation claimable as a supporting activity.
- In some cases, simulation proves a particular hypothesis, or set of hypotheses, problematic or unfeasible. But it does this in a way that would otherwise be extremely cost-prohibitive.
- In some cases it’s quite the opposite, where a company pushes simulations to the extent of their usefulness, then continues with physical experimentation because some variables can only be discovered in a real-world setting. In this case, it is important that some form of hypothesis and iterative experimentation already occurred in the simulation before the real-world experimentation, or else that simulation might be flagged as a due diligence activity (particularly in cases where the simulation suggested a hypothesis would be right on the first try, and real-world experimentation disproved this). On the other hand, in such a case at least the simulation encouraged the company to consider a particular hypothesis and continue testing, and provides a clear dividing line between where due diligence ends and SR&ED begins.
- Even if resources aren’t consumed in simulated experimentation, knowledgeable experts are still required to design and run the experiments, and their hours could be eligible for claiming.
Are there any other SR&ED eligible ways to experiment?
At the end of the day, there are three ways to prove or disprove a hypothesis. In addition to the two kinds already discussed, the third would be a set of equations (i.e. theoretical proof). However, theoretical proof often comes more in handy forming a hypothesis, while simulated and real-world experimentation can test hypotheses and generate good claimable hours.