Research & Development Tax Credits are an often overlooked benefit for companies of all sizes. Many businesses are missing out on claims worth thousands of pounds.
Simon Bulteel of Cooden Tax Consulting has filed numerous successful claims and shares his insight into how your company could be rewarded for innovation.
I’ll give you a few clues, it’s not the productivity gap, it’s got nothing to do with Brexit but it is related to innovation!
I’ve read a number of articles about innovation in The Manufacturer recently, and not one has mentioned Research & Development Tax Relief or R&D Tax Credits! Perhaps I just didn’t choose my sample well enough!
In a way I found it slightly disappointing that R&D Tax Relief didn’t take a very important place in these articles, but I am not surprised.
Despite having been available to SME companies since 2000 and to larger businesses a couple of years later, it remains probably the best kept secret in most industries across the UK, so why should manufacturing be any different?
In a nutshell R&D Tax Relief is there to reward any company that is “innovating” in the fields of science or technology. That generally means that any New Product Development or any product improvements are likely to be eligible to claim. It can also be extended to new manufacturing processes, process improvement and pilot and bespoke production.
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So why is it a secret?
That’s a very interesting question that there is no easy answer for, but in our experience, it is a combination of the following:
- a lack of communication from HMRC promoting R&D Tax Relief;
- a lack of knowledge in accountancy firms how to apply the R&D Tax Relief rules to a business;
- a concern amongst accountants about promoting it to established businesses they have dealt with for numerous years;
- risk averse owners and managers who think that a claim might be a “red flag” to HMRC;
- companies that are claiming are getting both a competitive and cashflow advantage over their peer group and therefore aren’t really promoting it to one another; and
- Agencies like Innovate aren’t allowed to actively introduce the companies who receive grant funding from them to professional service providers they are only allowed to nudge companies that they might be able to claim.
Despite the lack of promotion by HMRC, government are actively willing businesses to claim, because they know a little helping hand now will more likely than not lead to higher tax revenues in the future.
A quick look at the Innovation Landscape
The Office for National Statistics publishes an annual review of the R&D Tax Relief scheme, they published it in September and the findings particularly for manufacturing businesses are interesting.
Over 9,600 claims were made by small and medium-sized manufacturing companies under the SME Scheme, those that employ less than 500 employees, and have a turnover of less than €100m or a balance sheet value less than €86m, those claims were worth around £410m to those businesses, that’s an average claim value of over £42k.
A further 915 claims were made by small and medium-sized companies who had been subcontracted by a large or overseas company to perform some Research and Development, those claims under the less rewarding RDEC scheme were worth a further £35m.
Those claims make up a total of 26.54% of all claims submitted by SMEs.
When you look at claims made by large companies under the RDEC Scheme a total of 890 companies claimed over £600m, that’s an average claim of nearly £675k.
The Schemes in a nutshell
The SME Scheme generates an additional deduction of 130% of the eligible R&D expenses, which for a profit-making company could generate a tax saving at 19% of 24.7% of the eligible costs. For a loss- making company, the loss can be surrendered for an R&D Tax Credit of up to 33.35% of the eligible costs.
Under RDEC, you are able to generate an Expenditure Credit of 12% of the eligible costs, which will be taxable, the expenditure credit would then be deducted from the final tax liability, creating a ta saving equivalent to 9.72% of the spend.
Eligible costs include:
Staff costs – wages, salaries, bonuses, Ers NI, Ers Pension Contributions out of pocket expenses incurred for R&D
Third Party costs – Subcontractors (not eligible under RDEC) and agency workers (externally provided workers)
Consumed materials – either in the process or the manufacturing of a prototype and includes light, heat and water
A husband and wife who started out by building their eldest child an electric motorbike because he was fascinated by them at the age of 3 but didn’t want a hot exhaust and the weight of a traditional petrol bike anywhere near him if he fell off.
They manufacture a range of children’s bikes and are now moving into the adult market and even diversifying into their first petrol bike. The bikes are designed for trials riding, if you are of an age. as I am, you might remember Peter Purvis and Kick Start, that’s Trials riding.
They have been claiming for the design and subsequent improvement to their bikes over the last 5 years and have recently embarked on a Knowledge Transfer Partnership with the University of Brighton on a Lithium Battery project which will add further value to their claim in 2018 and 2019.
They specialise in the manufacture of bespoke machinery predominantly for the food processing industry, they started off manufacturing thermal transfer equipment, but now have extensive knowledge and capability with Dryers, Coolers, Cutters, Roasting Machines, Flavour Systems and Conveyors.
They are able to introduce a level of pre-existing knowledge into every project which acts as a baseline, but because most products are bespoke there is an element of innovative development that is required for each product, it is at this point that their claim for R&D Tax Relief begins and where our knowledge has helped them to claim.
If you are doing something interesting with science or technology in your manufacturing business, you really ought to explore your potential to claim. An initial phone call costs nothing and our “No Claim, No Fee” promise, means that all of the risk of a claim is placed firmly on our shoulders. It would be great to add you to those statistics next year!