R&D tax relief: A guide for engineering companies

Published:  14 February, 2020

By Cale Bannister, Myriad Associates.

R&D tax credits allow UK engineering companies to claim back up to 33.35p for every £1 spent on research & development (R&D) activities. However, only 36.8% of firms are claiming this government incentive according to statistics. It is estimated that around 80% of engineering firms would be eligible to claim from HMRC and with an average claim value of £52,848, UK engineering companies are clearly missing out.

So why are so few engineering companies claiming R&D Tax Credits? R&D tax relief enables engineering businesses that incur costs in developing products, processes, software, or services to receive a corporation tax deduction or cash payment from HMRC. The incentive is designed to encourage innovation and increase spending on R&D activities for engineering companies operating in the UK.

The challenge, however, is that most firms are unaware that their projects qualify for the incentive or believe the claim process is to complex. With R&D occurring in almost all stages of an engineering project; firms are well and truly missing an opportunity to make a claim. To give you an example, below are some common projects within engineering and manufacturing that can qualify for R&D tax credits:

● Developing new, or improving existing, products or processes

● Designing, prototyping and trialling

● Tooling and equipment fixture design and development

● Developing processes that would meet increasing regulatory requirements

● Streamlining manufacturing processes through automation

Even unsuccessful attempts of innovation can bring rewards that may benefit your company’s bottom line, as well your company bids to advance the science of technology within the sector. Claiming R&D tax relief for unsuccessful projects can help provide extra capital which businesses often invest in future business development projects.

R&D Tax Credits – How to claim

R&D and Innovation does not refer only to new products or ideas but can apply to new ways of doing things, such as altering business models to better suit the needs of customers and staff or adapting processes to improve the end product or service. To be eligible to claim for R&D tax relief, the project or business must:

● Have been working on any eligible projects within the last 2 years.

○ At the commencement of the project, the technical lead must have identified any technical difficulties which, if resolved, would result in an advancement in the science of technology within the marketplace.

● Have eligible costs including staff, agency, subcontractors (UK and overseas), software licenses and consumable costs.

● Include all the costs concerned within the company’s Profit and Loss account, as it is not possible to claim R&D tax relief of Fixed Assets.

● Be trading at the time of making the R&D tax relief claim.

● The knowledge capability required to undertake the project is not readily available in the public domain or considered difficult to deduce by a competent professional within the field.

One of the main reasons for engineering companies not claiming R&D tax relief, is simply because they do not know how to go about making the claim. On top of this, money often gets left on the table as businesses attempting to make a claim themselves often miss out on including all qualifying R&D activities and eligible costs.

One option is to make an R&D tax claim yourself, which can be done by entering your enhanced expenditure into the full Company Tax Return form (CT600). To calculate your enhanced expenditure, you need to:

1. Work out the costs that were directly attributable to R&D.

2. Reduce any subcontractor or external staff provider payments to 65% of the original cost.

3. Add all costs together.

4. Multiply the figure by 130% to get the additional deduction to put into your tax computations.

5. Add this to the original R&D expenditure figure to get the enhanced expenditure figure which you can enter into your tax return.

Hopefully we’ve provided a clearer understanding of what will - and will not - count as R&D for the purposes of tax and how far back you can claim. However, there’s still plenty we haven’t covered, and the application process is notoriously complex. Not only is there a large amount of paperwork, there’s plenty of room for error - which can be stressful and costly if uncovered by HMRC. Another option, which is often more favourable to companies, is to seek guidance from an R&D tax credit specialist. They will have a team of technical experts and R&D tax professionals who will be able to identify all qualifying activities as well as make the claim on your behalf. This ensures that your claim is maximised while minimising any risk of an enquiry by HMRC.

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