Last month, HMRC released updated statistics on the support that it provides to businesses via Research and Development (R&D) tax relief and R&D tax credits. Once again, the overwhelming majority of claims for 2015-16 came from the ‘manufacturing’, ‘professional, scientific and technical’ and ‘information and communication’ sectors; together, they represented almost three quarters of both the number of claims and amounts claimed for that year.
In this context, the potential importance of R&D tax credits to the Gloucestershire economy cannot be overstated. Employment in the manufacturing sector in Gloucestershire is the second largest in the county after the health sector and is above the national average. Subsectors as diverse as computer, electronic and optical products, fabricated metal products, manufacture of machinery and equipment, aerospace, rubber and plastics and food products represent the largest employers.
On the face of it, then, it seems a little surprising that many companies in the county seem rather reticent in claiming the generous support that is available through R&D tax credits.
We consider that using the term ‘R&D’ for this tax support is not helpful, and can discourage some companies from looking into it. For some people, ‘Research and Development’ has overtones more closely related to NASA than to a regional manufacturing company. However, those businesses who recognise that the tax support is focused at ‘on the ground’ activities can reap considerable benefits.
It is often best to consider some of the practical issues in the business when looking to unearth possible ‘R&D’ activities for a tax credits claim. For example:
How are the company’s products better than those of its rivals?
If the company has developed some technical ‘edge’ or improved capability for its products, the work in doing so may well qualify as R&D.
Does the company have a particular specialism?
If so, it may be approached by potential customers to consider whether new products or services can be developed that are unusual or relatively leading edge compared to other players. Work in ‘pushing the boundaries’ using specialist knowledge may constitute eligible R&D.
How is the company looking to improve its efficiency/profitability?
Rather than developing new products, the company may have focused on improving ways in which existing products are made, and whether they can be produced at lower cost, using different materials, new techniques, improved processes etc. Existing machinery may be adapted or modified to operate beyond its original designed parameters. Such investigation can often involve activities that qualify for R&D tax credits.
Is the business subject to regulatory changes?
The introduction of new regulations can require companies to consider changing the materials, processes or equipment that they use for production. Investigation of such changes can often involve qualifying R&D.
Has the company looked at new techniques or adaptation of new technologies?
Trialling and adapting new techniques and technologies from other industries in a different and uncertain industry context often involves eligible R&D activities.
Taking such a practical look at the key business issues usually offers good scope for identifying possible R&D activities as a starting point for a claim. This commonly leads to a better outcome than taking a more conceptual perspective based on a preconceived notion of what is ‘R&D’.
If you are unsure as to whether your company qualifies for R&D, or if you would like to discuss your business, please get in touch.