Making a change: R&D tax credit misconceptions in the manufacturing industry
As a specialist area of tax legislation, misconceptions about research and development (R&D) tax credits are rife. In this guest blog, our R&D Tax Credit specialists explain some of the ways in which it can pay to innovate in your manufacturing business. You may already be doing so – and could be missing out on a vital cash benefit.
Manufacturing involves everything from manual labour and handicraft through to high-tech machinery in factories. Clients sometimes tell us they have experienced little evidence of governmental support for the industry historically – they therefore assume the R&D tax-credit scheme is likewise leaving the manufacturing sector overlooked. But this is not the case; the legislation is broad, capturing all kinds of qualifying activity in order to encourage sustained growth through innovation in the sector.
Misconception #1: ‘Problem-solving is not R&D’
Speaking with clients from the manufacturing industry, we often hear how difficult an aspect of a project was because there was no easy solution at the time. In such cases, clients are describing potentially valid criteria for R&D work without realizing they qualify for it, that is: working to solve a problem where a solution was not readily deducible. This can assume many forms; but where problems faced relate to science and technology, work to resolve these problems can attract relief.
Misconception #2: ‘R&D is for products not processes’
The essence of manufacturing is the transformation of raw materials into finished goods. But this does not necessarily mean that the finished product is where the R&D work is located: R&D can be in developing new processes – even where the same product is created but in a better or more efficient way. Your product might, for example, have the same performance characteristics as one which is already on the market, but it is built in a fundamentally different way.
An R&D project seeks to make an advance in science or technology – the advance may be demonstrated in the tangible outcomes of your project (the material, device, or product you are building). But it can also be in the creation or improvement of a manufacturing process – where the outcomes are intangible: reduced costs, improved efficiencies, and less waste.
A useful example is one of our clients who had a process which involved manually welding studs into industrial flooring. The manual process was comparatively slow, with variable weld-quality, and it relied on a skilled operator to carry out the process.
Our client developed a test-rig that used a semi-automated stud-weld process. And while they encountered failure along the way, the new automated functionalities in the process offered cost-savings as well as newfound capabilities and efficiencies for technology in this field.
Misconception #3: ‘Something entirely new must be created’
Sometimes the technical difficulty which requires problem-solving arises from the complexity of a system, rather than how its individual components behave in isolation. This is often the case when changes to an element or component within a manufacturing process will affect the wider infrastructure or the final product.
Perhaps your manufacturing business’s development work was a rapid and reactive response to changes in legislation or regulation, which meant going far beyond routine upgrades or trivial fine-tuning to existing products or processes. This can be completely valid R&D activity and is a common trigger for development project in this sector.
Misconception #4: ‘Failed projects cannot be included’
Not all projects are successful – especially in manufacturing where there are many stages and stringent quality-control measures. What is important is that an advance was being sought, such as creating something new, appreciably improving an existing product, or developing a more cost-effective manufacturing process. Whether the associated challenges were ultimately overcome does not affect your ability to claim for the effort involved. And, if the product or process you sought to create or improve was carried out for a client it can sometimes still be included too.
Misconception #5: ‘Loss-making companies cannot make a claim’
The scheme is open to profit- and loss-making companies alike.
Small and medium-sized companies (generally those with fewer than 500 staff) can typically recover up to 33% of their development costs. (Companies exceeding these figures are still able to claim relief – but through a different scheme with a lower rate of relief.)
The relief works by allowing companies to enhance their R&D expenditure (including staff costs, subcontractors, consumables and software), to reduce taxable profits. Loss-making companies can choose to surrender their losses for a payable tax credit – receiving a valuable cash injection when their claim is made – instead of waiting until they make a profit.
Misconception #6: ‘Pension contributions cannot be included’
Eligible staff costs incurred within the last two accounting periods can be considered in a claim, and this can include company pension contributions in proportion with each individual’s R&D contribution. The legislative definition of staff costs includes gross salaries, employer National Insurance contributions and pension contributions, as well as some reimbursed business expenses. A percentage of your subcontractor, freelance, or agency-worker costs can also potentially be included in your claim.
It pays to innovate
The average claim value for SMEs in the UK is £54,214, but could be as high as hundreds of thousands of pounds and so it pays to make sure you’re not falling foul of these misconceptions.
To ensure your projects are properly claimed for, specialist guidance of the kind provided by our R&D tax-credit partner, is recommended. This will ensure you receive a full credit which catches all qualifying costs and reflects the work you have done.
For more a free eligibility assessment or review of a previous R&D tax credit claim, call Nick Golding on: 0300 303 0034; or e-mail firstname.lastname@example.org