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How does Revenue apply the "Technology Readiness Level" to the R&D Tax Credit?

Adopted by Revenue in the 2019 update to the R&D Tax Credit Guidelines[1], the TRL scale provides a metric by which to measure RD&I activity. Here, we outline our position on its inclusion in the guidelines, its assessment criteria, and its effect on R&D Tax Credit claimants.

Background

The “Technology Readiness Level” (TRL) is a system used to rank the maturity of a given technology. Originally developed and defined by NASA in the last quarter of the 20th century, the TRL scale has been widely adopted by governance agencies across a multitude of sectors. For example, the European Space Agency (ESA) adopted the system in 2008 and the European Commission introduced the TRL across its entire science and technology funding platform at the beginning of the H2020 programme in 2014.

In essence, the TRL scale is a communication tool which acts to distil multiple technological factors into a unique metric on a scale of 0-9, which spans from basic research to a fully deployed commercial application. Given the complex and uncertain nature of technology development it can be difficult to assign certain technologies to a quantised point on the scale. In an attempt to simplify this within the H2020 framework programme, the European Commission guidance suggests R&D activity fall between a range of TRL levels. Moreover the OECD supports this narrative, evident by their policy to pool TRLs into 4 broader categories.

In reality, R&D projects fall on a continuum of development, and tend to move up and down this spectrum depending on the projects performance. However, defining such a continuum is not practical, hence the TRL scale is the best approach to capturing this information. 

Revenue TRL Revenue Description KPMG description
0 Idea Idea formulation
1 Basic research Basic principles translated from scientific research
2 Technology formulation A technology concept is formulated in terms of how the basic principles
3 Applied Research First assessment of concept through actual research assessing technical and market feasibility
4,5 Small scale prototype
Large scale prototype
Early feasibility tested in laboratory by integrating basic technological components
6 Prototype system System, actual use and manufacturing tested and validated in user environment
7 Demonstration system Full integration of product and manufacturing technology now established in pilot line/ plant
8 First kind of commercial system Low scale pilot production demonstrated. Product launched to early markets
9 Full commercial application Manufacturing of system has been fully completed. Product is launched to majority markets

Perception & challenges

In 2019 Revenue introduced the TRL scale in the suggested file layout within the R&D Tax Credit Guidance[1]. Although we consider this a positive addition, which aligns the Irish regime to international approaches, there is uncertainty regarding what criteria are used to assess where a given technology should lie on the scale.

We appreciate that any benchmark criteria are highly industry specific. This can be seen in the wider community with the development of the ‘manufacturing readiness level’, ‘design readiness level’, ‘system readiness level’, and ‘supply chain readiness level’.

However there is little detail and guidance on the application of the TRL scale to the R&D Tax Credit. If we consider the S.766 legislation, R&D activity must be categorised as one or more of basic research, applied research, or experimental development[2]. The challenge for claimants is aligning these categories with the TRL scale in a systematic way. The 2015 Frascati manual highlights this challenge, and suggests that it is not possible to provide systematic mapping to the TRL scale[3].     

From an industry perspective the movement of a technology through the scale is often not evident at the outset of an R&D project, and an accurate TRL classification may only be apparent after the R&D activity has commenced. For example, the body of work, i.e. time, and investment to move a technology from demonstration system (TRL7) to first of a kind commercial system (TRL8) may be significantly greater than transitioning from, say TRL1- TRL2. Furthermore, complex technologies are often constructed from a subset of components (which in themselves may be complex technologies). Some of these components may lie at different levels of the TRL scale, how does one allocate the weighting of sub components on a holistic level?

This is more important for technologies assigned to higher points on the scale, where it can difficult to identify when R&D activity ends, and how to classify technology that rides the boundary between R&D and routine engineering.

Assessment of a technology and assigning it to the scale is often performed on an ad-hoc basis, and generally relies on the subjective opinion of a research team. Many attempts have been made to define assessment criteria. For example, the US-DoE defined a ‘technology readiness assessment’ guidance specific to their R&D[4]. However, the assessment criteria is cumbersome and difficult to complete, and would act to impede and deter claimants from the R&D Tax Credit.

Solutions

Developing accurate and universal assessment criteria is challenging. In the absence of defined assessment criteria, our R&D tax experts have developed explanatory guidance that may be tailored to specific industries. We have found that the technologies for most R&D Tax Credit claimant’s rank between TRL 3-8. Below we outline useful industry specific examples for the higher TRL levels that may act as a guide to R&D Tax Credit claimants. 

While we don’t suggest that Revenue define a unique set of criteria, an alternative approach may be to broaden the TRL scales into a set of categories, similar to the OECDs position. This would allow R&D Tax Credit claimants to broadly define their technologies and enable the organic movement of technologies up and down the scale without the need for additional assessment. Another approach may be to suggest an industry specific TRL scale, however this approach increases the burden on claimant companies and may undermine the R&D Tax Credit itself.   

Eoin McCarthy

Eoin McCarthy, PhD

Scientific Consultant
R&D Incentives Practice
KPMG Ireland
+353 1 410 2249

eoin.mccarthy@kpmg.ie

Industry

Applied Research

(TRL 3)

Scaled prototype

(TRL 4 , 5)

Prototype System

(TRL 6)

Demonstration system

(TRL 7)

1st of a kind Commercial application

(TRL 8)

Pharmaceutical

Testing the hypothesis and initial PoC for a new therapeutic is demonstrated in a limited number of in-vitro & in-vivo trials.

Safety of the candidate drug formulation demonstrated in lab (GLP) and animal model. Enough to support regulatory application.

Phase 1 clinical trials successful leading into Phase 2 trials. Regulatory submissions and review to the FDA / EMA.

Phase 2 clinical trials completed and approved to move to Phase 3 trials.

Trials complete with FDA / EMA approval upon review.

Software

Pre-alpha development: Coding starts, and functionality alterations are made until a working draft is created.

Alpha testing by internal developers and external testers. Testing internal workings of a program (“white-box” testing)

Beta testing for a sample set of end users. Assessing functionality of a program without knowledge of its internal workings (“Black-box”)

Open beta testing, available to a large cohort of non-specific users. Verification and validation complete.

First official, stable, software version released to end-users. Version 1.0  

Electronics

Component modelling and simulations validating analytical predictions.

Component is built and tested for basic functionality in a bench top and simulated operational environment. Performance predictions defined for final operation.

Component prototype that adequality addresses requirements is fabricated. Operation is demonstrated in a relevant environment, under critical environmental conditions.

Fully engineered unit that addresses all requirements is built. Performance is benchmarked in actual environment conditions.

Final device performance successfully demonstrated in operational environment.

Medical Devices

Analysis begins to test hypothesis. Identify and evaluate component technologies. Initial tests of design concept, and evaluation of candidate. Design verification, critical component specifications, and testing developed.

Candidate devices are built and evaluated in non-GLP and animal environment to assess safety. Device specific procedures and methods for clinical use are evaluated.

Device tested on small number of subjects in clinical trial. Component tests, drawings and master device record are verified. Production technology demonstrated through cGMP qualification.

Class II-III prototype device operational in a real environment. Clinical safety and effectiveness trials completed. Final product design validated.

FDA / EMA pre-market approval for medical device. Completed and validated device production.

Outlook

The TRL scale is a useful metric if we can develop the tools to assess the allocation criteria systematically and accurately. Considering the legacy of the TRL scale, it may evolve to become a core metric within the R&D Tax Credit claim. Our suggestion is to define a clear and simplified set of criteria, and outline how the TRL scale contributes to the R&D Tax Credit regime from a Revenue perspective.

Footnotes

  1. Revenue, Tax and Duty Manual, Part 29-02-03 R&D Tax Credit, 2019
  2. Section 766, Tax Consolidation Act 1997
  3. Frascati Manual 2015, OECD
  4. Technology Readiness Assessment Guide, US Department of Energy (US-DoE), 2011