The UK has a long and proud tradition of manufacturing – this is, after all, the birthplace of the Industrial Revolution – and Britain currently is the world’s ninth-largest manufacturer by output.
To learn to survive the instability and make the most of the opportunities of the coming decade, UK’s manufacturers must consider how to remain viable. From 2021 and beyond, UK manufacturers will need to be investing in research and development to innovate and keep up with the changing needs of the country – and the world.
And for companies registered in and operating in the UK, that innovation means they have access to tax relief from the UK government.
What are R&D tax credits and who qualifies for them?
Businesses registered in the UK have access to the R&D Tax Credits scheme. This form of tax relief from HMRC is designed to help businesses undergoing innovation and development as a way to improve their operations and/or their products and services.
There are two R&D tax credit schemes available for claiming tax relief:
- The small or medium sized enterprise (SME) scheme
- The research and development expenditure credits (RDEC) scheme
Businesses can use these tax credits to then reinvest into more innovation, and so the cycle continues.
SMEs are offered a generous amount of tax relief through the scheme – they can claim back up to 33p for every £1 spent on R&D – so it’s worth bearing in mind when it comes to accounting time.
To qualify as an SME for R&D tax credit purposes, companies must have:
- A staff headcount of less than 500, and
- A turnover of under 100 million euros or a balance sheet total under 86 million euros
The SME R&D tax relief allows companies to:
- Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
- Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
However, there is no single definition for what qualifies as innovation or what falls under applicable R&D activities under the R&D tax credits scheme, which makes it tricky for SME business owners to understand how to access this tax relief.
What activity can qualify for R&D tax credits in the manufacturing sector?
The cost of R&D is made up of myriad smaller parts, such as the time and resource spent on defining objectives and feasibility studies; on analysis, design and development; on testing; and on project management. It’s not just about the thing itself, it’s about everything that goes into its development.
Activities within the manufacturing sector that could qualify for R&D tax credits include:
- Improvement of existing product specifications to reduce weight or size
- Design and development of new tooling and equipment
- Advancement of production and processing through the use of new technologies
- Analysis and integration of new materials to improve processes and products
- Prototyping, innovation and testing, even if this process results in failure
- Development of design innovations to improve on the existing state of the art
- Creation of new or bespoke products for specific customer requirements
- Investment in sustainable manufacturing or material solutions
- Modification of existing processes to improve output and performance, reduce waste, or meet environmental standards
According to the HMRC’s guidance, you can claim a proportion of the salaries, wages, Class 1 National Insurance contributions and pension fund contributions for staff working directly on the R&D project, as well as a percentage of software licence fees, subcontractor costs, and more.
Why don’t more businesses claim this tax relief?
“Innovation” has come to be used almost as jargon in the modern corporate world: everyone is looking for innovation, and what is developed in its name is often not particularly innovative. In this space, the term “R&D” can take on a different meaning, one wrapped in science laboratories and the latest world-shaking discoveries.
But the truth is, most sectors and businesses have access to innovation – they just need to know how to phrase it for HMRC tax credit purposes.
The HMRC R&D tax credits scheme is heavily under-utilised across most sectors largely because of the deliberate ambiguity in what qualifies. Even some accounting professionals are unsure whether their clients qualify for R&D tax credits.
SMEs can be put off by the complicated application process, too; SME leaders just don’t have the time to look deep into the business and identify exactly which projects could be classed as R&D for tax relief purposes. Any misunderstanding or application issue could result in wasted effort, and no tax credit.
But many just don’t know the R&D tax credits scheme exists; its discovery often relies on accidental findings or through research into new funding streams for the business.
Where can you go from here?
What qualifies for tax relief under this scheme is not always straightforward, which is why working with an independent partner can help to maximise your chances of a successful tax relief claim.
Easy R&D works in partnership with business leaders looking to claim R&D tax relief from HMRC. Our expert team of consultants works on a system of five easy steps, carrying out the majority of the claim process, keeping client commitment to a minimum and maximising the claim value that can be received.
With a single-minded focus on R&D tax relief and a diverse team of technical experts, Easy R&D works hard for clients so they can in turn put more back into their business. This helps clients to focus on what’s most important: growing their business.
Get in touch with our team for a free consultation and find out how you can claim R&D tax relief for your manufacturing business.
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