EEF Insight: R&D tax relief

Posted on 7 Mar 2012
HMRC is encouraged to provide support for qualifying companies

Wen Zheng is a mechanical engineering consultant at Leyton, an international group with 15 years global experience in processing R&D tax claims. But Zheng is concerned that only a relatively small number of manufacturers still take advantage of this support. Here she raises awareness.

2011 was a challenging year for manufacturers, especially as the eurozone crisis intensified. However, if you ask UK manufacturers about their individual prospects for 2012 most express cautious optimism. Strength in demand from markets outside of Europe is expected to continue. Opportunities for developing service offerings around their products have also been identified.

Wen Zheng - mechanical engineering consultant at Leyton.
Wen Zheng - mechanical engineering consultant at Leyton.

What data we have seen in the New Year suggests that the sector may slowly have started to turn a corner, with output expanding in December 2011 and January 2012 promising similar production results.

So, while commentary in the media focuses on the ongoing challenges in our major markets across the channel, manufacturers themselves, while not discounting this, appear to be getting on with the business of finding new ways to grow their companies. One means to this end however, is the Research & Development (R&D) tax relief scheme, which despite having been around for over a decade is often overlooked.

R&D tax relief schemes

Introduced in 2000, primarily for SMEs, this is a tax incentive that reduces a company’s corporation tax liability by enhancing its tax deductible expenditure. The resulting tax benefit can take various forms including a refund of tax liability, cash credit (currently up to £24.5 for every £100 of qualifying spend) and tax losses, all of which are valuable monetary assets.

With a subsequent addition of a similar scheme for large companies, the two schemes have evolved significantly over the first decade of this century. When the credit crunch hit the UK, government introduced further enhancement to support SMEs by increasing the enhanced spending percentage to 225%. Similarly, to recognise large company contribution to the economy, an above the line tax credit similar to that of the cash credit for SMEs will be introduced from 2013.

Does my company qualify?

For many companies, the schemes can offer significant financial benefits. But access needs to be demystifyed.

Many manufacturing companies believe that R&D activities are undertaken by people in white coats working in laboratories, or only include design and development of revolutionary products. While this traditional view of R&D is no doubt representative of some qualifying activities for R&D tax relief, it is by no means a comprehensive view.

To understand R&D from a taxman’s perspective, businesses need to grasp a key premise of the schemes. The tax incentive is designed to reward efforts to improve know-how, not necessarily only products.

To qualify for relief, companies need to undertake projects that consist of activities that are aimed at achieving technological advances by resolving technological difficulties, through a systematic and investigative approach.

The table below shows a list of typical qualifying activities that can be considered for relief in three of the most common disciplines (see table).

HMRC

Companies may have various experiences in dealing with the tax authorities. What is slightly different and interesting to note in the R&D tax sphere is that HMRC is encouraged to provide support to qualifying companies. R&D tax claims made by SMEs are primarily dealt with by seven specialist units within HMRC, which also provide support to tax inspectors who handle large company tax affairs. Having the ability to navigate the relevant tax legislation and communicate with HMRC effectively is paramount to a claim’s success.

For further information please contact Suzie Dennis sdennis@leyton.com.

R&D tax claims are often only ever completed by the bigger firms, while the benefits can be spread to smaller firms
R&D tax claims are often only ever completed by the bigger firms, while the benefits can be spread to smaller firms