Manufacturing Research & Development
For the first time since Research & Development (R&D) tax credits were introduced, the annual tax savings claimed by UK manufacturing companies topped £1 billion according to the Office of National Statistics’ (ONS) latest report.
The increase in R&D claims results from more manufacturing companies realising that the product and process improvements they make may qualify for relief. There was a 21% increase in the number of claims made by manufacturing companies compared to the previous year. The average tax saving within the sector was over £90,000 per claim. However, there are still many firms that are not claiming the tax relief that they are entitled to. R&D tax credits might be claimable for relatively common activities such as:
- Attempting to develop a new or improved product or manufacturing process.
- Improving product or manufacturing processes to take account of changes in legislation, such as health and safety laws or environmental regulations.
- Working with new or alternative materials.
- Reducing tolerances.
- Overcoming technological problems and challenges.
How Much Tax Relief can be Claimed?
R&D tax credits work by reducing a company’s corporation tax bill or by generating a cash repayment to the company if it doesn’t have a tax liability. There are two schemes for claiming relief: the Small or Medium sized Enterprise (SME) Scheme and Research and Development Expenditure Credits (RDEC) Scheme.
Under the SME Scheme, a company can deduct 230% of its qualifying R&D costs from its taxable profits instead of the normal 100%. This can result in significant tax savings, as shown in the illustration below for a company with £750,000 of qualifying R&D expenditure.
The level of R&D expenditure does not need to be this high. In fact, according to the ONS, most claims for R&D tax credits involve less than £50,000 of qualifying costs. The effective saving offered by the SME Scheme is approximately 25% of the qualifying R&D costs. The RDEC scheme is slightly less generous, as illustrated below for a company with £750,000 of qualifying R&D expenditure. Under the RDEC scheme the company is paid a 12% credit by HMRC. However, this credit itself is taxable, resulting in a net benefit of circa 10% of the qualifying R&D expenditure.
What Costs Qualify?
The legislation only permits certain costs to be claimed.
- Staff costs relating to R&D activities. This is often the largest area of a company’s claim.
- Externally provided workers, such as those provided by an agency.
- R&D activities that are subcontracted to another party.
- Software license costs.
- Consumable items (heat, light and power, and materials and equipment used or transformed by the R&D process).
The costs can only be claimed if they are attributable to qualifying R&D activities.
Is my Company Small, Medium or Large?
A SME is a company with fewer than 500 employees and either of the following:
- An annual turnover not exceeding €100 million; and
- A balance sheet not exceeding €86 million.
Companies in excess of these limits are large for R&D purposes. If the company is in a group or has external investors, it may be necessary to include their figures when considering if the company should claim under the SME Scheme or the RDEC Scheme. Most SMEs will be entitled to claim under the more generous SME Scheme, but some have to make RDEC claims, where for example their expenditure has been subsidised by a government grant.
If you would like to discuss Manufacturing Research & Development with us in more detail or if you would like to find out if you are eligible to make a claim, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Manufacturing & Engineering team.
This article featured in issue 4 of our manufacturing and engineering newsletter series. Read the full newsletter here: The Engine – Issue 4