David Crowter, Tax Client Service Director at MHA Carpenter Box, has helped many local businesses to successfully claim this valuable government reward for innovation.
Unfortunately, claiming R&D Tax Credits has turned into a minor industry, with hundreds of ‘consultants’ and businesses popping up all over the place. One consequence has been that ‘target’ companies have started to view the whole thing with suspicion as they receive email after email and call after call to secure a meeting. The great shame is that properly done, and for businesses meeting the criteria R&D Tax Credits are a great financial incentive for businesses that innovate – which is exactly what government intends.
Basically, Research & Development (R&D) Tax Relief is a government-backed corporation tax incentive, aimed at stimulating innovation and development in UK industries. Why? Because investing in innovation is good not only for every business, but also for the UK economy as a whole.
R&D Tax Relief is perhaps one of the least understood reliefs, both amongst the companies that might have a claim and also amongst the advisers who might help them make one. But successfully claiming R&D tax relief can provide significant cash flow benefits, either by reducing a company’s tax liability or claiming an additional tax repayment (R&D tax credits).
According to HMRC statistics on R&D tax incentives, the total benefit claimed by the industry in 2015/2016 exceeded £900 million. During that year, manufacturing was making up a total of 32% of the total amount claimed, placing it in the top 3 benefitting industries.
The Government reported in 2017 that manufacturing dominates UK R&D spending, which in 2015 totalled £14.6bn. According to those numbers, only 6% of UK R&D costs in manufacturing are currently claimed for through R&D tax relief.
How does it work
The net benefit of research and development (R&D) tax relief ranges from 9% to 33% of eligible expenditure, depending on the size of the company and whether a profit or loss has been made.
R&D in manufacturing can be found in areas of innovating technologies, which are aimed at increasing the competitive capability of the industry. This would encompass not only the development of new processes, machines or systems, but also improvements of existing ones.
In general, manufacturing is the business of producing developed goods in larger numbers, however many companies also engage in product development. The development of new products or appreciable improvement of existing products would be perhaps the most obvious area to look at for R&D.
Examples of R&D in Manufacturing Include:
Appreciably improving manufacturing processes that deliver substantial productivity, quality or environmental benefits, as well as the development of new processes, including new materials, coatings, methods, and practices associated with these processes.
Creating or appreciably improving manufacturing equipment that create increased capability (such as accuracy or repeatability), increased capacity (through productivity improvements or cost reduction), or increased environmental efficiency (safety, energy efficiency, environmental impact etc.).
- Advances in controls, sensors, networks, and other information technologies that improve the quality and productivity of manufacturing cells, lines, systems, and facilities.
- Advances in extended enterprise functions critical to manufacturing, such as quality systems, resource management, supply chain integration, and distribution, scheduling and tracking.
- Technologies that enable integrated and collaborative product and process development, including computer-aided and expert systems for design, tolerancing, process and materials selection, life-cycle cost estimation, rapid prototyping, and tooling.
The drive behind the development varies and can include saving energy, water, space or production time, minimising waste, pollution and costs, improvement of work conditions, introduction of new elements or automation of the process and upscaling.
If your engineers or technologists encounter failures or technical challenges and issues in the course of their work, or the completion of a project takes longer than projected, this could indicate the presence of qualifying activities.
If your technical team spent time improving processes or developing solutions to technical problems, performing feasibility assessments or trying to find solutions through an iterative process of trial and error, this is very likely to qualify.
Although almost a third of all R&D tax relief claims were from the manufacturing industry in 2015/2016, significant numbers of potentially eligible UK businesses are currently not taking advantage of the opportunity.
Unfortunately, there are some common misconceptions that stop companies from claiming, and therefore it is important to remember a few key points:
- The R&D does not necessarily need to be ground breaking.
- If someone else has already achieved a result, your work to get to the same stage can still qualify.
- Loss making companies without a tax liability can still benefit.
- It is not a requirement to own any patents or other IP.
- Work done in other countries or work that has been subcontracted out can still qualify.
The tax incentives available are generous, but the R&D must be thoroughly assessed and claims carefully calculated to ensure they meet HMRC requirements. The requirements are increasing, and each claim is carefully reviewed by HMRC. Therefore, it is important to work with experienced advisers to ensure your claim meets the necessary criteria.
How we can help
At MHA Carpenter Box, our Tax Services Group and R&D specialists are well equipped to help businesses identify qualifying expenditure and maximise their claim.
For more information, please contact David Crowter on 01293 227670 or sign up to our monthly newsletter service at www.carpenterbox.com/newsletter