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Innovation: why manufacturers are missing out on R&D tax relief

By Chris Unwin, CEO of conveyor and automation system manufacturer L.A.C. Conveyors 

For the last few years, there has been a lot of debate in regards to how innovative Britain is. On one hand, the figures show that we’ve come a long way, having moved up the ranks from the 11th most innovative country in 2011 to 2nd in 2014, according to the Global Innovation Index (though we’ve since dropped to the 5th). On the other hand, some of the most well-known British brands are failing to make it on to the annual Thomson Reuters Top 100 Global Innovators list, with our innovation ‘lagging’ behind other European countries such as France and Germany. We also hear a lot about innovation ‘failures’ and how it’s costing UK companies billions of pounds a year!

We all know the importance and benefits of research and development – it enables us to grow as a business, and an economy, to stand out from our competitors and to meet the ever-changing needs of the consumer. Being seen as an ‘innovative’ company also allows us to attract the best talent, which in turn breeds more innovation.

It’s great that the Government has a scheme in place to encourage scientific and technological innovation within the UK, with its R&D tax relief. Moreover, it’s great that manufacturers accounted for 28% of the total amount claimed in 2015-2016, according to the latest statistics from HMRC. Yet, the industry seems to be aware that the R&D tax credit process is complicated and confusing and that there are many manufacturers – particularly start-ups and SMEs – that don’t know they can apply for such relief.

This leads me to believe that it’s not that manufacturers find innovation difficult (it’s part of our DNA!) but that the ideas are there – businesses just aren’t sure how to progress them, financially.

What is R&D tax relief and why all the confusion?

Considering the above to be the case – that there are many manufacturers out there unaware of the Government’s scheme –  it’s worth explaining exactly what the scheme is. By official definition “R&D is a Corporation Tax (CT) tax relief that may reduce your company’s tax bill if your company is liable for CT or, in some circumstances, you may receive a payable tax credit”. It’s also worth noting that “for tax purposes, R&D takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology”.

 Read HMRC’s full 45-page document and it’s likely you’ll be left with a headache; no wonder then, that in 2015-2016, only 17% of claims came from manufacturing companies that were less than 5 years old. There is a lot of confusion over whether a product qualifies for the scheme and how to apply, and misconceptions include the notion that something entirely new must be created, that failed projects cannot be included and that loss-making companies cannot make a claim. A quick Google search will reveal a number of others.

There also seems to be a level of mistrust in the scheme, and it’s disconcerting to hear of companies that are cold-calling manufacturers offering to help them process their R&D tax relief claims, in exchange for a cut of the money that’s saved through the tax relief. This is something we’ve experienced ourselves and have always thought them to be some kind of scam, though I am sure there are many legitimate companies offering such a service.

L.A.C. Conveyors: a case study 

It may be helpful to share our own experience at L.A.C. Conveyors here. It was only after the phone calls we received that we started to look into the scheme, though we quickly decided that we did not qualify for the tax relief. It wasn’t until much later on when our bank relationship manager, who has vast knowledge of manufacturing businesses, asked if we were claiming that we decided to look into it again.

When we read the HMRC document we were, like many other, confused. Due to our lack of knowledge and understanding of the claim process we used the service of a large accountancy firm with specific expertise in this area to help us identify claimable activities and complete the required forms.

Now we know the ropes we can say that somewhere between 10% and 15% of our annual work activity is of a claimable nature; so far, the credit has allowed us to design and develop a new to the marketplace robotic pick and place machine along with a new website and marketing literature.

How can other SMEs get involved? 

We are of the belief that if we can see great success from the Government’s scheme, then so can others! There’s no shortcut to being able to better understand the process, which is why it’s important to take some time to really dissect HMRC’s document and accompanying Government information. This web page is particular helpful at explaining the different types of R&D relief and how, in order to get the relief you need to explain how a project:

  • Looked for an advance in science and/or technology
  • Had to overcome uncertainty
  • Tried to overcome this uncertainty
  • Couldn’t be easily worked out by a professional in the field

Like us, it’s also a good idea to speak to your bank and speak to any other professionals that can help – though beware that there are scams out there! It goes without saying that you should always undertake thorough research into any company before handing any information over to them!

Perhaps with increased awareness that help is out there, manufacturers will be more likely to promote a culture of R&D and choose to go ahead with projects that they’d previously brushed to one side because they simply didn’t know how to move forward with them on a financial level.