Manufacturing Research & Development
According to the Office of National Statistics’ (ONS) latest report, the annual tax savings claimed by UK manufacturing companies topped £1 billion for the first time since Research & Development (R&D) tax credits were introduced.
There was a 21% increase in the number of R&D claims made by manufacturing companies compared to the previous year. This is a result of more manufacturing companies realising that the product and process improvements they make may qualify for relief.
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.
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:
1: The SME Scheme – Small or Medium sized Enterprise
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 (See 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.
2: The RDEC Scheme – Research and Development Expenditure Credits
The RDEC scheme is slightly less generous. (See the illustration 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 will have to make RDEC claims, where for example their expenditure has been subsidised by a government grant.
This article featured in issue 4 of our Manufacturing and Engineering newsletter series.Read The Engine Issue 4
A version of this blog originally appeared on the blog of our national association MHA.