Essential to claiming the RDTI is hypothesis driven research. We cover learnings from guidance material and provide professional insights about the construction and documentation of valid hypotheses.
In recent times, a lot has been made of the word ‘hypothesis’ in the context of the R&D Tax Incentive programme. Despite being merely a step in the scientific process referenced in the legislation, demonstrating a valid hypothesis is arguably one of the most important pieces of the puzzle in making a robust claim. In this article we examine the historical explanations of what a hypothesis is as per various guidance materials and provide some inline learnings about the construction and documentation of valid hypotheses.
Explanatory Memorandum
The explanation of what constitutes a valid hypothesis is sparse in the original explanatory memorandum with reference to and experiment being something that entails “investigating causal relationships among relevant variables to test a hypothesis or determine the efficacy of something previously untried.”
Learning One:
Here we can immediately see that a project objective of ‘That we can develop a platform to do XYZ’ is insufficient because it does not contain reference to any causal relationship or variables.
Guide to Interpretation – Old Version
Whilst soon to be replaced, the old version of the Guide to Interpretation has some of the most concrete examples and explanations of what a valid hypothesis looks like.
“A hypothesis is simply a statement that can be proven right or wrong by conducting an experiment.
The hypothesis reflects a particular technical or scientific idea and is commonly expressed as a relationship between variables (or technical features) which can be proven or disproven.”
A hypothesis … “should be focussed on the technical or scientific area of uncertainty, and not framed in terms of any commercial or economic aims. An ‘overarching’ or ‘commercial’ hypothesis does not help to determine what the experiment is trying to test, or whether the activities are eligible.”
Learning Two:
- In contrast to the example of the untestable, unfalsifiable insufficient hypothesis in this document, the examples of valid hypotheses typically follow the following format:
- When the newly developed technology / algorithms / solution / intellectual property
- is subject to the input / interaction of independent variables
- an output / dependant variable is produced
Whether the hypothesis is supported or rejected measured and compared to the expected outcome.
Guide to Interpretation – Refreshed Version
Interestingly, the discussion of what a valid R&D Tax Incentive hypothesis is has been dramatically stripped back in the refreshed version of the Guide to Interpretation, with the following extracts being of particular importance:
“Your hypothesis is your idea or proposed explanation for how you could achieve a particular result and why that result may be or may not be achievable.”
“You need to develop it before you start your eligible core R&D activities. You need to be able to test it through experiments you conduct to determine the outcome of your core R&D activities.”
Learning Three:
Crucially, we see here the importance of developing and recording a statement of hypothesis prior to the conduct of the Core R&D Activities, which is logical given the hypothesis being the first step of the scientific process.
The Latest AAT Case
The need to develop and document a valid hypothesis (or series of hypotheses) is further reaffirmed by the decision passed down in Royal Wins Pty Ltd and Innovation and Science Australia [2020] AATA 4320 (28 October 2020), referencing previous decisions in Rix’s Creek Pty Limited; Bloomfield Collieries Pty Limited and Innovation Australia [2017] AATA 645 and Mount Owen Pty Ltd and Innovation Australia [2013] AATA 573:
”Vague, generalised description of the claimed activities is not sufficient to establish that a hypothesis was formulated and that the activities claimed were carried out to test that hypothesis. An ex post facto attempt to construct or discover a hypothesis with the benefit of hindsight after the workers can [sic] carried out will not satisfy the requirement that the activities be “systematic, investigative and experimental.”
Learning Four:
Claimants should ensure that statements of valid hypotheses are formulated and recorded prior to the conduct of a systematic progression of work and / or prior to each individual instance of a specific test within the larger progression of work.
Whilst other sources of evidence may be sufficient to satisfy certain requirements (e.g. witness testimony to support the purpose of conducting activities), it will be extremely difficult to convince an assessor, tribunal or judge that a systematic progression of work based on scientific principles has been undertaken without providing evidence that robust hypotheses were formulated and recorded prior to Core R&D Activities being conducted.
Need help with developing your R&D Tax Incentive hypothesis before launching into your project? Chat with our seasoned R&D Tax Consultants who can help with compiling high-quality applications.
