IT technologies are constantly evolving, making them natural areas for research and development activities. The sector is constantly looking for new ways to solve problems, optimize processes and introduce innovations that transform the way digital systems work. But is every activity in this area part of R&D? If so, what benefits can arise from it?
The concept of research and development (R&D) activity
In general, research and development (R&D) refers to activities of a creative nature, carried out in a structured manner, the purpose of which is to expand existing knowledge and, as a result, develop new applications and solutions.
R&D is defined in different ways, however the definitions are similar.
For example, the income tax laws defines this activity as a creative activity involving scientific research or development work, undertaken in a systematic manner to increase the stock of knowledge and use the stock of knowledge to create new applications. Scientific research and development are defined in the aforementioned laws by reference to the relevant definitions in the Law on Higher Education.
Thus, scientific research is an activity that includes basic research and applied research. Whereby basic research is understood as empirical or theoretical work aimed primarily at acquiring new knowledge about the fundamentals of phenomena and observable facts without aiming at direct commercial application. Application research, on the other hand, is understood as work aimed at acquiring new knowledge and skills, aimed at developing new products, processes or services or introducing significant improvements to them.
Development, on the other hand, is an activity involving the acquisition, combination, formation and use of currently available knowledge and skills, including in the field of IT tools or software, for production planning and the design and creation of changed, improved or new products, processes or services, excluding activities involving routine and periodic changes made to them, even if such changes are improvements.
The above terms have separate definitions under state aid law. Following Commission Regulation No. 651/2014, fundamental research means experimental or theoretical work undertaken primarily to acquire new knowledge about the fundamentals of phenomena and observable facts without aiming at direct commercial application. Industrial research, on the other hand, means planned or critical research aimed at acquiring new knowledge and skills in order to develop new products, processes or services, or to make significant improvements to existing products, processes or services. They include the creation of components of complex systems and may include the construction of prototypes in a laboratory environment or interface environment simulating existing systems, as well as pilot lines when these are necessary for industrial research and especially to obtain proof in the case of generic technologies. Under the aforementioned regulation, experimental development, on the other hand, means the acquisition, combination, formation and use of currently available scientific, technological and business knowledge and skills, as well as other relevant knowledge and skills, in order to develop new or improved products, processes or services. They may also include, for example, activities to conceptually define, plan and document new products, processes and services. Experimental development may include the development of prototypes, demonstrations, development of pilot projects, testing and validation of new or improved products, processes or services in an environment that serves as a model of real-world operating conditions, the main purpose of which is to further technically improve products, processes or services whose final form has not yet been determined in principle.
Activities in the IT sector as R&D activities
Undoubtedly, activities in the IT sector can constitute R&D activities.
Research and development (R&D) in the IT sector is crucial to technological progress and innovation, affecting many fields. Through R&D activities, cutting-edge solutions such as algorithms, artificial intelligence, cloud computing and blockchain are developed to increase efficiency, automate processes and create new products and services. They help solve global social and environmental problems, supporting sustainable development and analyzing data in areas such as health care. Also, in the face of growing digital threats, cybersecurity research is essential to protect users’ data and privacy, and technological advances are driving digital transformation, improving the operations of both public institutions and private entities. Finally, IT work or research contributes to economic development, creating new jobs, increasing the competitiveness of companies and enabling them to better respond to changing market needs.
In order for IT activities to be considered R&D activities within the meaning of the referenced regulations, and as a result bring the resulting benefits, they generally must meet (cumulatively) the following conditions:
Novelty – the activity carried out involves the creation of new technological solutions or the introduction of breakthrough innovations (e.g., in software) that go beyond what is currently available on the market, for example:
- development of new algorithms, e.g. in the field of artificial intelligence (AI), machine learning or network optimization, which can significantly improve the performance and efficiency of the systems in use;
- new cloud technologies, e.g. research on optimizing data processing in distributed cloud environments, development of new cloud resource models or solutions for managing large data sets.
Creative nature – involves, in particular, the introduction of innovative solutions that can significantly improve parameters such as performance, scalability or security of systems. In this context, it is not a simple implementation of known solutions, but a creative approach to solving technical problems, for example:
- searching for new methods of optimizing databases to speed up access to information with an increasing number of user queries (using out-of-the-box methods);
- creation of novel AI models that can be applied to autonomous management systems, such as self-learning energy management systems in smart cities (creative use of AI).
Unpredictability – means the lack of knowledge of the outcome of actions taken in advance and includes, among others:
- experimentation with quantum technologies in the area of data processing, where it is not obvious what specific results will be obtained or how long it will take to develop a solution that will work in a predictable way (research on new technologies);
- the development of new encryption methods and communication protocols in IT systems may involve unpredictable challenges and results, as security threats are constantly evolving and solutions must be dynamically adapted (development of new security mechanisms).
Methodicality – involves conducting activities in a systematic way, using accepted research methods, for example:
- agile IT project management – systematically conducted iterative research and development, testing different approaches to solving complex technical problems;
- creating prototypes of software or IT systems (e.g., new algorithms or processing technologies) and testing them under controlled conditions to confirm or disprove hypotheses about their performance or functionality
Transferability or replicability – the results of the work must be sufficiently well documented and developed to be transferable to other organizations, industries or technologies, for example:
- the results of the research will be made available through open source software so that other researchers or companies can use the technology, develop it or apply it to other fields;
- new software, IT system prototypes or other solutions can be transformed into commercial products and implemented on a large scale in industry, for example, the optimization algorithm developed can be integrated into commercial ERP systems.
Practical tip
In general, a division of R&D work into basic research, industrial research and development can be adopted. The Technology Readiness Level (TRL) scheme developed by NASA makes it possible to assign the stage a project is at to a particular type of R&D work. For IT projects, NASA has developed an industry qualifier: https://www.nasa.gov/pdf/458490main_TRL_Definitions.pdf (accessed on 24/10/2024).
Benefits of qualifying activities undertaken in IT as R&D
By qualifying the activities undertaken as R&D, and within it as, for example, development work or basic research, a number of benefits can be achieved.
For example, meeting the conditions for qualification as R&D activity within the meaning of income tax laws allows one to take advantage of a number of tax benefits, including the research and development tax relief (allowing one to deduct qualified costs under this credit from the tax base, so in practice, double recognition of qualified expenses as tax deductible costs) or the IP Box (entitling to a reduction of the income tax rate to 5%). It also allows for preferential treatment when applying for income tax exemptions based on the decision on support in the Polish Investment Zone.
The definitions in the income tax laws regarding R&D activities are also relevant for the purposes of applying for support under the Program for Supporting Investments of Significant Importance to the Polish Economy for 2011-2030 (the so-called government grant).
On the other hand, definitions arising from Commission Regulation No. 651/2014 are used in most calls for applications for funding (grants) from European Union funds. In the situation of applying for EU grants, the above-mentioned qualification to a given level of technological readiness is also important, as each stage is assigned a different level of support and may even be excluded from the possibility of receiving funding.
Summary
IT activities may constitute research and development activities. Such qualification allows for a number of both tax and non-tax support instruments (e.g., grants from European Union funds).
