R&D Tax Credits for Engineering Firms
Throughout history, British engineers have been responsible for some of the world’s greatest inventions including the lightbulb, radio, jet engine, and motor car. From Michael Faraday to George Stephenson, British engineers have left an enormous impact on the world through their research and development (R&D) activities.
R&D in the Engineering Sector
The UK’s engineering sector remains fundamental to the economy and employs approximately 57 million people, accounting for just over 19% of all British jobs. Large engineering companies like Aston Martin, Dyson, Rolls Royce and BAE Systems are strategic employers in key geographical regions, although small and medium sized enterprises (SMEs) dominate the sector in terms of technological contribution. It is estimated that the engineering industry contributes around £500bn to UK GDP each year.
Most types of engineering business could be eligible to claim under the R&D tax credit (SME) scheme provided they pay UK corporation tax and their R&D projects meet HMRC’s criteria. Considering the engineering sector’s half a trillion pound contribution to the UK economy, it is surprising that only £525m is claimed in R&D tax relief. This accounts for just 2% of the total value of R&D tax credit claims.
Why do so few engineering firms claim R&D tax credits?
As a leading expert in R&D tax credits, we often hear common misconceptions about research and development from engineering and manufacturing businesses. The phrase ‘research and development’ can conjure thoughts of rockets, white lab coats, and test tubes which often discourages businesses from applying for vital funds they are eligible for.
Any UK company that undertakes high risk projects where success is not guaranteed while seeking the resolution of technical challenges might be executing qualifying R&D activity without realising it. Furthermore, the R&D tax credit (SME) scheme is not designed solely with profit-making businesses in mind. Loss-making companies in need of a cash injection are also eligible for R&D tax relief so long as they have invested in qualifying development.
Essentially, any UK company that performs and invests in development work to overcome a specific technological or scientific uncertainty could qualify.
HMRC’s baseline definition of R&D is broad and includes many day-to-day activities that engineering experts take for granted.
“R&D is a project that seeks an advance in technology through the resolution of scientific or technical uncertainties that are not deducible by a competent professional in that field”.
What types of engineering R&D projects and activities qualify?
Each R&D claim is assessed on its own merit against HMRC guidelines. From our experience in handling thousands of engineering R&D tax relief claims, your R&D project has a good chance of qualifying if:
- You have developed a new or improved an existing product, process, or service.
- It involves creating and testing new designs and prototypes.
- New materials or material combinations are used.
- It results in an appreciable improvement to a product or process.
- It automates or streamlines a process.
- The development is implemented in a unique or challenging environment.
- It involves the design of new or improved machinery, electrical products, or components.
The above examples are simple criteria that do not automatically qualify a project and instead are indicative of the types of projects we commonly see.
Engineering sectors covered by the R&D tax relief scheme
The R&D Tax Credit (SME) scheme does not discriminate between engineering disciplines so long as project qualification criteria is satisfied. Over the last 25 years, we have submitted tax claims for a broad range of engineering firms spanning:
- Aerospace & Avionics
- Architectural Engineering
- Automotive Engineering
- Biochemical Engineering
- Building & Construction Engineering
- Chemical Engineering
- Civil Engineering
- Defence Technology Engineering
- Electrical & Electronics Engineering
- Environmental Engineering
- Geotechnical Engineering
- Hydrology Engineering
- Manufacturing Engineering
- Marine Engineering
- Materials Engineering
- Mechanical Engineering
- Oil & Gas Engineering
- Plant Engineering
- Power Engineering
- Rail Engineering
- Software Engineering
- Surveying Engineering
- Systems Engineering
- Telecoms & Network Engineering
- Transportation Engineering
Examples of R&D in Engineering
HMRC encourages all types of eligible business to apply for R&D tax credits irrespective of size or turnover, not just multinational companies involved in huge technological breakthroughs. This includes any new or established incorporated business that is equally passionate about innovation as global engineering brands.
Below are a few examples of innovations in engineering that would likely qualify.
- Digitally integrated, automated 3D scanning with CAD reconstruction – assisting engineering firms in efficiently replicating components while minimising manual processes.
- Pragmatic semiconductor innovation – silicon removed resulting in a thin, low cost and flexible integrated circuit for embedding in everyday electronic objects (incl. Internet of Things application).
- Silicon carbide (SiC) electronics – to power such things as wind turbines and hybrid vehicles while increasing upper operating temperatures from industry standard 125°C to 600°C.
- Self-healing polymers – ‘smart materials’ containing self-healing agents for thermoset, elastomer, and powder coatings to treat metal structures in harsh environmental conditions.
- Ultracapacitors – have 10,000 times the power capacity of standard D-cell sized electrolytic capacitors and offer an unparalleled life span. An innovation that could change the way we manufacture.
Benefits of claiming R&D tax credits
The funds proactive engineering businesses receive after successful R&D tax relief claims can be reinvested in a multitude of ways. Many specialist engineering firms have reported that savvy reinvestment has had a transformative effect on their business’ competitiveness and their ability to innovate. Companies could be at a competitive disadvantage if they don’t utilise the relief.
Although not exhaustive, the below examples illustrate some of the main ways engineering businesses reinvest their R&D tax credit entitlement.
- Fund more R&D activity – the funds from HMRC could be reinvested back into R&D projects, thus continuing a cycle that will support ongoing R&D tax credit claims in the future.
- Accelerate business plans – reinvest into site expansion or new facilities (e.g. new office or R&D laboratory) or fund the creation of new product, services, and processes sooner than expected.
- New plant or equipment – fund the missing piece in increasing your efficiency and productivity. This could be upgrading IT infrastructure, installing a brand-new production line, procuring machinery, or updating phone systems.
- Recruit new talent – strengthen your talent pool and competitiveness by investing in new technical engineering expertise, whether that be apprentices, technicians, or senior engineers.
- Improve credit rating – thereby reducing costs of supply.
- Increase company sale value – for those organising an exit strategy and future sale.
Why use Cost Care Tax for your engineering R&D tax credit claim?
Since the launch of the scheme in 2000, we have successfully reclaimed millions of pounds in R&D tax relief for several hundred engineering and manufacturing businesses across the UK. Our highly skilled team is trusted by many accountants and engineering firms to provide specialist advice they can count on. Each client can be confident that Cost Care Tax will work tirelessly to maximise claims while complying with HMRC eligibility requirements. Our fees are inclusive of any liaison with HMRC which may be necessary to ensure a successful outcome and you will only be liable for payment of our fees following a successful claim.
- Your claim managed from start to finish by our team of tax specialists.
- Dedicated Key Account Manager to assist you every step of the way.
- Maximise your R&D claim by identifying qualifying engineering projects and eligible expenses.
- Market-leading technical reports that present your R&D activity to HMRC.
- We manage all interaction with HMRC so you don’t have to.
- No claim – no fee charging structure with no nasty surprises.
- Always up to date with the latest HMRC guidelines.
If you would like us to start working on a claim for you, please get in touch and speak to one of our friendly advisors to discuss your eligibility.
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