R&D Tax Credits for Manufacturing Firms
The roots of modern manufacturing as we know it today can be traced back to the Industrial Revolution which started in Britain in the late 1700’s. Rapid industrialisation caused a major shift away from a mainly agriculture-based economy to one driven by machines, systemisation, and mass production. No matter the class of the person, whether that be poor working class, middle class, or wealthy nobles, advances in technology and new manufacturing concepts redefined these class boundaries and changed living standards forever.
The technological advances made by British inventors and engineers over the last 250 years – for which they would surely receive R&D tax relief today – are tightly intertwined with our history. John Kay’s ‘flying shuttle’ revolutionised Britain’s textile industry, James Watt’s steam engine powered the industrial revolution for over a century, and the invention of the Bessemer Process made the production of steel from pig iron far more efficient.
Following the Second World War, the UK’s manufacturing industry started to decline as the economy shifted towards modern services and importing more goods from overseas. Over the last 40 years, finance and service sectors, and the number of people they employ, have grown exponentially at the cost of traditional industries such as coal mining and shipbuilding.
Despite the rebalancing of our economy towards services in recent times, UK manufacturing remains a critical sector employing approximately 2.7 million people. The UK retains its position as the ninth leading manufacturer and tenth in terms of global exports with output totalling £191 billion in 2019 – a 7% increase since 2014.
Faced with increased competition from emerging economies, UK manufacturers must continue to develop their productive capabilities in order to remain internationally competitive. The UK compares well against the leading industrialised countries on various measures of innovation including research and development and investment in intangible assets.
What is R&D Tax Relief?
Research & Development (R&D) Tax Relief is a government incentive launched in 2000 to give financial rewards to innovative companies, with the aim of accelerating the UK economy’s long-term growth. Between 2000 and 2019, over 300,000 R&D tax credit claims were made totalling £33.3 billion. The R&D tax credit (SME) scheme allows businesses that undertake qualifying R&D activity to claim a corporation tax reduction against qualifying expenditure, or to claim for a payable tax credit for loss-making organisations.
So why do so few manufacturing businesses claim R&D tax credits? The phrase ‘research and development’ invokes thoughts of test tubes, rocket scientists, and white lab coats, but that simply does not reflect reality. As leading experts in R&D tax relief, we hear many misconceptions about the scheme that deter businesses from making a claim. Even small businesses with no R&D department can make a successful claim so long as the activity qualifies against HMRC’s criteria.
HMRC’s baseline definition of R&D is broad and includes many day-to-day activities that manufacturing 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”.
Manufacturing sectors covered by the R&D tax credit scheme
The manufacturing sector is comprised of thousands of businesses operating in a variety of industries who may be eligible to claim R&D tax relief on their investments. Some of the industries include but are not limited to:
- Textiles and clothing
- Metal fabrication
- Rubber and plastics
- Food and drink
- Electronical and optical equipment
- Publishing and printing
- Machinery and equipment
- Pulp, paper, cardboard and other packaging
- Sustainable and recycled materials
- Rubber and plastic products
- Non-metallic mineral products
- Transport equipment
- Many more
Examples of R&D in Manufacturing
The R&D tax credit scheme is designed for all types of business regardless of their size, turnover, or sector; whether that be small start ups or large multinational organisations. Qualifying R&D projects can involve the appreciable improvement of an established product or process, or the realisation of a ground-breaking technological improvement, and everything in between.
Below are a few examples of innovations in manufacturing that would likely qualify.
- The development of a new machine prototype with brand new functionality that appreciably increases productivity.
- The design of novel or custom tools to assist in product manufacturing.
- Integrating complex manufacturing processes.
- Developing new machinery or processes to reduce material wastage and increase efficiency.
- Developing new processes or materials to reduce the business’ environmental impact.
- Increasing the precision of manufacturing processes through the development or modification of machinery, tooling, or materials.
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.
Does my R&D manufacturing project qualify?
Your business must be based in the UK and be subject to Corporation Tax while meeting the viable ongoing trade requirements to be eligible for the scheme. The rules below help businesses and HMRC to determine the eligibility of all R&D projects regardless of industry, sector, or business type:
The R&D project aimed to resolve scientific or technological uncertainty
For instance, the project must present technical challenges that are not easily deducible or solvable by a competent professional working in the field. The competent professional should be uncertain as to whether the project objective is achievable, even after researching all available industry knowledge and guidance.
The R&D project seeks the advancement of knowledge
Projects that develop a brand-new product, machine, manufacturing process, or service typically qualify against this criterion so long as the generation of new knowledge is evidenced. The modification or upgrade of an existing product or service can also attract R&D tax credit qualification. Even if the R&D project fails or is abandoned, R&D tax credits may still be claimed as long as an advancement in technological or scientific knowledge has been pursued.
More detail surrounding R&D tax relief qualification criteria and the ‘importance of technological uncertainty’ can be found here.
Why claim R&D tax credits?
The financial rewards proactive manufacturing businesses receive on the acceptance of their R&D tax relief claims can be reinvested in a variety of ways. Many of our manufacturing clients have reported that, if invested in the right way, the funds have had a transformative effect on their competitiveness and their ability to innovate and grow.
The examples below illustrate some of the ways manufacturing businesses can reinvest their R&D tax credit entitlements:
- 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 products, services, and processes sooner than expected.
- Buy 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 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 manufacturing businesses across the UK. Our highly skilled team is trusted by many accountants and manufacturing 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.
With a wealth of experience gained over 25 years of submitting R&D tax credit reports to HMRC, Cost Care Tax is well placed to assess the eligibility of your claim. Call us today for a no obligation exploratory conversation with one of your tax experts.
Cost Care is here to support accountants and your clients - call our team of experts today and refer your client …