How Can You Identify R&D Activities Within Your Business Operations?

Identifying research and development (R&D) activities can mean several different things. For example, it may involve recognizing which of a company’s activities qualify as R&D and are therefore eligible for support or tax incentives. It can also mean having a potentially qualifying activity assessed and certified by the National Research, Development and Innovation Office (NRDI Office). Finally, once an activity has been confirmed as genuine R&D, the related costs must be separated from other business expenses to identify the actual R&D costs.

Do you develop products? Do you improve methods as part of your core business activities? Your company may be eligible for R&D tax incentives.

In previous articles, we have already discussed the characteristics of genuine R&D activities. Consistently applying these criteria is essential for reliably identifying R&D within a company’s operations. It is important to note that an R&D activity does not have to result in a patented invention, nor must it be limited to groundbreaking discoveries, inventions, or basic research. Activities aimed at improving a product—for example, making it more energy-efficient—or developing a business process in a novel way that can be applied by others may also qualify as R&D.

Preliminary Classification of R&D Activities

Currently, unlike in the past, preliminary R&D classifications are issued not by the Hungarian Intellectual Property Office but by the National Research, Development and Innovation Office (NRDI Office). Although its decisions are not legally binding, obtaining a preliminary classification is still highly advisable, as the tax authority typically seeks the Office’s opinion during audits or proceedings.

It should be noted that organizational changes may affect this area from time to time. Nevertheless, it is likely that innovation will continue to receive government support and that some form of preliminary qualification system will remain in place.

Identifying R&D Activities

The identification and differentiation of R&D activities from other business activities are generally based on the principles set out in the Frascati Manual. According to this framework, R&D encompasses any systematic creative work undertaken to expand existing knowledge. This includes not only scientific, technical, and technological knowledge, but also knowledge relating to humanity, culture, and society, as well as the development of novel applications that resolve existing scientific or technological uncertainties.

A key requirement is that the results of R&D must be reproducible and/or usable by others.

While research institutions are primarily engaged in creating new knowledge, businesses must assess innovation against the current state of knowledge in their field. Most companies operate based on existing knowledge to manufacture products or provide services. However, when they encounter problems for which no readily available or adaptable solution exists, they may need to generate new knowledge. Importantly, the project’s outcome must represent novelty not only for the company itself but also for the wider industry.

If solutions from another industry can simply be adopted—or adapted through routine modifications—such adaptation generally does not constitute R&D. However, if novel solutions must be developed during the adaptation process, the activity may qualify as R&D.

When a company identifies activities aimed at generating new knowledge or developing innovative solutions and decides to seek official classification, it is extremely important to demonstrate how the intended knowledge advancement compares with current domestic and international knowledge. This requires references to professional literature, scientific publications, and existing methodologies in the relevant field.

For example, if a company intends to develop an electric motor with the same weight as existing market alternatives but with greater performance and range, it must evaluate currently available motors and clearly define the project’s objectives relative to them. The objectives should be realistic and achievable, but the solution should not be obvious to a competent engineer.

The Success of an R&D Project Is Inherently Uncertain

One of the strongest indicators of novelty and technological uncertainty is project risk. If success cannot be guaranteed—even when all available knowledge and expertise are applied—the project is likely exploring unknown territory and can therefore be considered R&D. Scientific or technological uncertainty exists when it is not yet known whether something is scientifically possible, technologically feasible, or how it can be implemented and measured in practice.

A social sciences example illustrates this well: research has already identified a relationship between coping mechanisms and emotional intelligence, but their impact on leadership effectiveness remains unclear. Investigating this relationship could provide the basis for new methods and practices and may therefore qualify as R&D.Importantly, whether a project ultimately succeeds or fails is irrelevant to its classification. Even unsuccessful projects may qualify as R&D if they were genuinely aimed at generating new knowledge or resolving uncertainty.

R&D Requires Systematic Documentation and Reproducibility

R&D activities must be documented systematically, and their results should be reproducible or accessible to others. While companies often protect outcomes as trade secrets or intellectual property, reproducibility can still be demonstrated within the organization by enabling other researchers and specialists to understand and repeat the work.

Support of R&D activities through tax incentives and direct funding

Incentives in the Hungarian tax system and direct funding for R&D projects

Examining the Legitimacy of R&D Tax Incentives

R&D or Not? Distinguishing Between Activities Within an R&D Project

After identifying genuine R&D activities, companies should distinguish between tasks that are essential to achieving the R&D objective and those that are merely supportive. An R&D project may involve numerous activities that are not R&D in isolation but are nevertheless inseparable from the research effort. Such activities should not automatically be excluded from the scope of R&D if they are integral to achieving its objectives.

Some activities require case-by-case evaluation. Examples include data processing and market research. While neither typically qualifies as R&D on its own, both may be considered part of an R&D project when they are essential elements of the research process.

Conversely, construction activities generally do not qualify as R&D—even if facilities are built specifically for experiments—because those facilities typically remain useful for other purposes after the project concludes.

Training and education must also be assessed carefully. General higher-education studies, although potentially useful for future research, are too broad in nature to be considered R&D. However, training participants to conduct a specific experiment within a project may qualify. Likewise, projects focused on developing innovative educational methodologies may constitute R&D.

A useful guideline is always to consider the element of novelty. Independent evaluations, benchmarking exercises, software development, data analysis, and social science research can all qualify as R&D when they aim to develop new methods or generate new knowledge. If they merely apply existing methods, they generally do not.

Administrative and support functions that only indirectly assist research activities are not considered R&D. Utilities, transportation, warehousing, cleaning, routine maintenance, security services, finance, and human resources activities generally fall outside the scope of R&D. An exception may be the maintenance of research infrastructure directly supporting research activities.

Certain pre-commercialization activities may still be part of R&D in the early stages but become routine business functions once the technological uncertainty has been resolved. Examples include prototype production, pilot manufacturing, and production organization. In these cases, the degree of novelty and remaining uncertainty must be assessed carefully.

Similarly, commercial development activities may qualify as R&D if they are intended to further improve a product, service, or process. However, once the product or service is considered finalized and the purpose becomes market expansion, the activity is no longer R&D.

In summary, the key to identifying R&D activities lies in making clear distinctions between activities based on their purpose and content. Companies must determine whether an activity is genuinely directed toward generating new knowledge, developing innovative solutions, and resolving scientific or technological uncertainties. They must also assess how integral each task is to the research effort and whether the product or service has reached a stage where uncertainty has been eliminated and activities have shifted toward production, marketing, or commercialization.

Proper classification of R&D activities can help businesses maximize access to available incentives, tax benefits, and innovation support programs.