Mike Price, Director at R&D tax credits claims specialist, The MPA Group, says engineering and manufacturing businesses should ensure they are not missing out on the financial benefits delivered by the Government’s R&D Tax Credit Scheme. The scheme rewards companies that invest in innovation and in 2016 saw £2.9bn awarded to UK companies, including many engineering businesses.
Creating a successful engineering business is difficult to do
Business owners know that their number one priority is to deliver to market the products and services their customers want, as efficiently as possible. This translates into overcoming the many daily challenges organisations face, and ensuring that their investment decisions make it possible to create and produce new and better products and services at lower costs and higher value to customers.
The old adage ‘innovate or die’ now resonates more strongly than ever, and market competition is putting increased pressure on businesses to fight ever harder for valued orders.
One way engineering firms can stay ahead of the pack is by fostering a working environment which recognises innovation as strategically important. By doing so it helps to tackle issues connected to areas such as enhanced productivity, faster product development and more effective operational efficiency – some of the key factors that will influence business success over the long-term.
The Government has, for a number of years, recognised the value that innovation delivers. That is why in 2000 it created the Research and Development Tax Credit Scheme, designed to incentivise and reward both large and small companies that are prepared to invest in innovation.
Put simply, the scheme means that an organisation incurring costs in developing new and improved products, processes or services can receive a cash payment from HMRC via a tax credit or a tax reduction. In reality, this results in an often significant cash injection back into a business or reduced liability on tax bills. Cash that can then be reinvested to support new business ventures, further equipment investment or employ a greater number of skilled staff.
What qualifies?
The tax break principles of R&D tax credits reward and protect innovation for the long term. The simple way to assess whether activities qualify is to view the ‘difficult bits’ as the prime areas that demonstrate innovation ambition.
Efforts to think out of the ordinary, projects that fail, but with lessons learnt go onto succeed through the development of a new product, service or process, or even projects that just come to a natural conclusion – all are eligible. The journey to their creation – not the standard steps – are what will entice HMRC to reward pushing the envelope. Even loss-making companies are viable when it comes to submitting a claim.
Some examples where engineering organisations can demonstrate qualifying activities include, the time a company spends on a R&D project or the costs incurred using specialist subcontractors to undertake work businesses can’t do to support a R&D project, or items that are ‘consumed or transformed’ by the R&D process, for example components purchased to construct a prototype, as well as software used as part of the R&D project.
It is therefore vital that all such activities and investments are not missed when compiling a R&D tax credit claim. There is no limit on the amount that can be claimed and typically organisations can recover 33% of qualifying costs. HMRC figures from 2015-16 show that the average claim value under the scheme was £109,500 – which for a SME engineering firm is a substantial addition to the bottom line.
Different thinking
Some of the work being undertaken by the UK’s engineering sector is breath-taking in its ambition and complexity, and should rightly be recognised as such. As such, it is important engineering companies look to see their work not just as ‘something we do’ but, instead, view it as helping to lead the generation of innovative achievement companies. This, together with expert assistance from R&D tax claims specialists to help guide them, will be pleasantly surprised to see how many of their daily activities qualify under the HMRC’s rules.
Companies can choose to do whatever they want with the funds. Some ring fence it to employ more engineers to further drive innovation or purchase new equipment to fuel further growth. While others use the cash to take R&D through to commercial production and payback.
It is safe to say also that for a number of companies the ability to obtain a cash injection thanks to tax credits has been a lifeline. Not only has it supported them when financial pressures have been intense, it has also provided the funds to help the company expand and grow.
Using specialists
The R&D Tax Credit Scheme is an area of tax law which can be confusing to understand or appreciate. As in other areas of a firm’s financial arrangements for which they seek specialist help, the same is true to make the most of the tax credit scheme. Experts with proven sector technical expertise and a clear understanding of what HMRC are looking for are the ones best placed to compile and submit claims on behalf of firms.
Company owners who think their activities may be eligible should be challenging their financial advisors and asking why they have not been proactive in helping them secure their rightful share of the £16.5bn in tax relief claimed since the scheme first launched 17 years ago.
Indeed, MPA’s experience tells us that due to a lack of specific advisor knowledge around the scheme, it could well have cost companies many hundreds of thousands of pounds as relevant claims fail to be submitted or are subject to HMRC rejection.
On a positive note, the engineering sector is already leading the way when it comes to successful R&D tax credit claims according to recent HMRC figures. Often with long and proud histories, many engineering companies are seizing the opportunity to benefit financially from the innovation they are driving each day.
In the last year MPA has delivered more than £31m in tax savings to UK businesses, of which £11m was delivered to the nation’s manufacturing sector through the R&D Tax Credit Scheme.
For more information call 0808 208 5221 or visit: www.thempagroup.co.uk
