Innovation and R&D: The Differences Between the Two Concepts

When seeking to claim the Research Tax Credit (CIR) or the Innovation Tax Credit (CII), it is essential to understand the difference between the concepts of Research & Development (R&D) and Innovation. Indeed, any confusion between these terms can result in the denial of tax credits as well as financial penalties. In this article, we will examine the difference between Innovation and R&D as defined by the scientific community and as interpreted by the tax authorities, which administer the CIR and CII.

Why is the distinction between innovation and R&D important?

To qualify for a tax credit, companies can apply for CIR and/or CII certification depending on the type of work they undertake, the resources (both material and human) they use, and their objectives. It is therefore essential to clearly distinguish between expenses related to innovation and those related to R&D to avoid financial penalties during a tax audit.

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The Frascati and Oslo manuals provide a clear understanding of these two concepts and help distinguish between them. Indeed, they offer rigorous, widely accepted definitions of innovation and R&D.

R&D and Innovation: Definitions

Innovation According to the Oslo Manual

Here is the definition of innovation and its different types according to the third edition of the Oslo Manual:

An innovation is the implementation of a new or significantly improved product (good or service) or process, a new marketing method, or a new organizational method in business practices, workplace organization, or external relations.

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There are three types of innovation: product innovation, process innovation, and marketing and organizational innovation. It is worth noting that this definition has some additional nuances in economics and outside the European Union.

R&D as defined by the Frascati Manual

The definition in the Frascati Manual serves as the standard for Research & Development, covering both basic and applied research as well as experimental development. Here is the definition:

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R&D encompasses: systematic creative work undertaken to expand the body of knowledge—including knowledge of humanity, culture, and society—as well as the application of this body of knowledge to new uses.

Innovation and R&D According to the Tax Authority

When preparing an application for the CIR or CII, it is essential to distinguish between innovation and R&D according to the tax authorities’ criteria.

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Under the CIR and CII programs, innovation is considered to be market-oriented, whereas R&D is considered to be scientific or technical in nature. In other words:

• An innovation project involves competitive intelligence focused on the state of the market and the competitive landscape at a given point in time. It enables the design of a new product or prototype that offers superior performance in one of the following areas: ergonomics, eco-design, functionality, or technology.
• The R&D project involves advancing the state of the art and addressing the technological barriers and challenges that have been identified. Overcoming these challenges requires the implementation of a creative or inventive process that may lead to the publication of articles or patents.

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We can see here that eligibility for the CIR is based on scientific and technical contributions and the generation of new knowledge, whereas eligibility for the CII depends on demonstrating that there has been an improvement in performance.

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