Server-side activities have been updated

If you use SharePoint Designer 2013 to build workflows, there's a fair chance you'll have come across the following error message:

Server-side activities have been updated. You need to restart SharePoint Designer to use the updated version of activities.

 Needless to say, restarting SharePoint Designer rarely makes the error go away. The usual advice is:

Approach 1: Clear the cache folders
See for example How to Clear Your SharePoint Designer 2010/2013 Cache. If you've just deployed some custom workflow activities to your site, this will probably solve your problem (and you should clear the cache folders every time you deploy custom activities). If the error occurs spontaneously, this approach often won't help.

Approach 2: Reinstall SharePoint Designer
This might work if you've got a preview version of SharePoint Designer installed. If not, it's unlikely to help. It didn't work for me, and it didn't work for countless others on the forums.

Approach 3: Install SharePoint Designer on another machine
This one kind of annoys me... it usually works, but it's hardly a practical solution to the problem.

In my case, having tried approach 1 and 2 and having established that the problem was client-specific (a colleague was able to connect to the same sites and create workflows just fine), I did some digging around to see what else could be causing the problem.

Short Answer

(If you're working on a Windows client rather than a SharePoint server)

Check your Programs list for Workflow Manager Client 1.0. If it's there, uninstall it. The Workflow Manager Client needs to run on every SharePoint server in a farm when you pair the farm with a Workflow Manager deployment. In my case, I'm using SharePoint Designer on my laptop to build workflows on an Office 365 site, so there was no reason for the Workflow Manager Client to be there. (I'm not even sure how it got there - maybe bundled with Visual Studio.)

In my case, once I'd uninstalled Workflow Manager Client, I was able to create and edit workflows in SharePoint Designer without errors.

*** Update 27 November 2015 ***: A new issue has emerged where running Visual Studio 2015 and SharePoint Designer 2013 on the same machine appears to be causing the same problem (without Workflow Manager Client). Installing SharePoint Designer 2013 with SP1 before you install Visual Studio appears to prevent this issue from occurring. If it's too late for that, uninstalling and reinstalling Visual Studio seems to fix the problem. (See https://community.office365.com/en-us/f/154/t/409588?pi14985=2 for more on this issue.)

*** Update 16 September 2016 ***: As of January 2016 there's a SharePoint Designer 2013 patch that fixes this issue specifically (https://support.microsoft.com/en-us/kb/3114337). Thanks to Jeremy Morel for the pointer.

Long Answer ("Show your work")

I started by getting a colleague, John Devaney, to run SharePoint Designer and connect to the site. Once we'd established he was able to create and edit workflows, we compared the contents of our cache folders. The contents of the WebsiteCache folder (%USERPROFILE%\AppData\Local\Microsoft\WebsiteCache) showed some key differences. When you drill down into the version folder for a particular site, mine looked like this:

Whereas John's looked like this:

We'd both started with empty cache folders. However, John's SharePoint Designer instance downloaded, generated, or copied in a handful of assemblies and culture definitions (the NLP files), whereas mine failed to do so. 

I experimented with copying these files across to my own cache folder. The key file turned out to be the Microsoft.SharePoint.WorkflowServices.Activities.Proxy.dll assembly. If I copied this assembly across to my cache folder, I was able to create and edit workflows. Without it, I got the Server-side activities have been updated error.

Next, I had a closer look at how SharePoint Designer goes about getting these assemblies. I used Fiddler to look at the web traffic that SharePoint Designer generates when I try to create a new workflow. It calls various client-side object model (CSOM) methods, including two methods in the WorkflowDeploymentService class:

• GetDesignerActions. According to MSDN, this method "returns a list of valid Workflow Manager Client 1.0 actions for the specified server". As you'd expect, the response body contains a bunch of SharePoint Designer actions in .actions4 (XML) format.
• GetActivitySignatures. This method takes a single DateTime argument named lastChanged, which suggests a connection to SharePoint Designer caching. Again, as you'd expect, the response body contains a set of activity definitions in XAML format.

The fact that these methods interact with Workflow Manager Client 1.0 on the SharePoint server got me thinking, so I checked the Programs list on my laptop. The working theory is that information on the local instance of Workflow Manager Client could conflict with the information returned by the server, and somehow prevent SharePoint Designer from generating the proxy assemblies. Regardless, uninstalling the local Workflow Manager Client instance solved the problem for me.

Seeing as it's not an easy issue to replicate, I'd be interested to hear whether this fix works for other people.