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

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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.

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Oil extends losses as Texas prepares to ramp up output

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Oil extends losses as Texas prepares to ramp up output 1

By Ahmad Ghaddar

LONDON (Reuters) – Oil prices fell from recent highs for a second day on Friday as Texas energy firms began to prepare for restarting oil and gas fields shuttered by freezing weather.

Brent crude futures were down $1.16, or 1.8%, to $62.77 per barrel, by 1150 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell $1.42, or 2.4%, to $59.10 a barrel.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, according to analysts.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

However, firms in the region on Friday were expected to prepare for production restarts as electric power and water services slowly resume, sources said.

“The market was ripe for a correction and signs of the power and overall energy situation starting to normalise in Texas provided the necessary trigger,” said Vandana Hari, energy analyst at Vanda Insights.

Oil fell despite a surprise fall in U.S. crude stockpiles in the week to Feb. 12, before the freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

The United States on Thursday said it was ready to talk to Iran about both nations returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons.

While the thawing relations could raise the prospect of reversing sanctions imposed by the previous U.S. administration, analysts did not expect Iranian oil sanctions to be lifted anytime soon.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” StoneX analyst Kevin Solomon said.

(Additional reporting by Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; editing by Jason Neely)

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Analysis: Carmakers wake up to new pecking order as chip crunch intensifies

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Analysis: Carmakers wake up to new pecking order as chip crunch intensifies 2

By Douglas Busvine and Christoph Steitz

BERLIN (Reuters) – The semiconductor crunch that has battered the auto sector leaves carmakers with a stark choice: pay up, stock up or risk getting stuck on the sidelines as chipmakers focus on more lucrative business elsewhere.

Car manufacturers including Volkswagen, Ford and General Motors have cut output as the chip market was swept clean by makers of consumer electronics such as smartphones – the chip industry’s preferred customers because they buy more advanced, higher-margin chips.

The semiconductor shortage – over $800 worth of silicon is packed into a modern electric vehicle – has exposed the disconnect between an auto industry spoilt by decades of just-in-time deliveries and an electronics industry supply chain it can no longer bend to its will.

“The car sector has been used to the fact that the whole supply chain is centred around cars,” said McKinsey partner Ondrej Burkacky. “What has been overlooked is that semiconductor makers actually do have an alternative.”

Automakers are responding to the shortage by lobbying governments to subsidize the construction of more chip-making capacity.

In Germany, Volkswagen has pointed the finger at suppliers, saying it gave them timely warning last April – when much global car production was idled due to the coronavirus pandemic – that it expected demand to recover strongly in the second half of the year.

That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery.

“Last year we had to furlough staff and bear the cost of carrying idle capacity,” said a source at one European semiconductor maker, who spoke on condition of anonymity.

“If the carmakers are asking us to invest in new capacity, can they please tell us who will pay for that idle capacity in the next downturn?”

LOW-TECH CUSTOMER

The auto industry spends around $40 billion a year on chips – about a tenth of the global market. By comparison, Apple spends more on chips just to make its iPhones, Mirabaud tech analyst Neil Campling reckons.

Moreover, the chips used in cars tend to be basic products such as micro controllers made under contract at older foundries – hardly the leading-edge production technology in which chipmakers would be willing to invest.

“The suppliers are saying: ‘If we continue to produce this stuff there is nowhere else for it to go. Sony isn’t going to use it for a Playstation 5 or Apple for its next iPhone’,” said Asif Anwar at Strategy Analytics.

Chipmakers were surprised by the panicked reaction of the German car industry, which persuaded Economy Minister Peter Altmaier to write a letter in January to his counterpart in Taiwan to ask its semiconductor makers to supply more chips.

No extra supplies were forthcoming, with one German industry source joking that the Americans stood a better chance of getting more chips from Taiwan because they could at least park an aircraft carrier off the coast – referring to the ability of the United States to project power in Asia.

Closer to home, a source at another European chipmaker expressed disbelief at the poor understanding at one carmaker of how it operates.

“We got a call from one auto maker that was desperate for supply. They said: Why don’t you run a night shift to increase production?” this person said.

“What they didn’t understand is that we have been running a night shift since the beginning.”

NO QUICK FIX

While Infineon, the leading supplier of chips to the global auto industry, and Robert Bosch, the top ‘Tier 1’ parts supplier, both plan to commission new chip plants this year, there is little chance of supply shortages easing soon.

Specialist chipmakers like Infineon outsource some production of automotive chips to contract manufacturers led by Taiwan Semiconductor Manufacturing Co Ltd (TSMC), but the Asian foundries are currently prioritising high-end electronics makers as they come up against capacity constraints.

Over the longer term, the relationship between chip makers and the car industry will become closer as electric vehicles are more widely adopted and features such as assisted and autonomous driving develop, requiring more advanced chips.

But, in the short term, there is no quick fix for the lack of chip supply: IHS Markit estimates that the time it takes to deliver a microcontroller has doubled to 26 weeks and shortages will only bottom out in March.

That puts the production of 1 million light vehicles at risk in the first quarter, says IHS Markit. European chip industry executives and analysts agree that supply will not catch up with demand until later in the year.

Chip shortages are having a “snowball effect” as auto makers idle some capacity to prioritize building profitable models, said Anwar at Strategy Analytics, who forecasts a drop in car production in Europe and North America of 5%-10% in 2021.

The head of Franco-Italian chipmaker STMicroelectronics, Jean-Marc Chery, forecasts capacity constraints will affect carmakers until mid-year.

“Up to the end of the second quarter, the industry will have to manage at the lean inventory level,” Chery told a recent Goldman Sachs conference.

(Douglas Busvine from Berlin and Christoph Steitz from Frankfurt; Additional reporting by Mathieu Rosemain and Gilles Gillaume in Paris; Editing by Susan Fenton)

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Aussie and sterling hit multi-year highs on recovery bets

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Aussie and sterling hit multi-year highs on recovery bets 3

By Tommy Wilkes

LONDON (Reuters) – The Australian dollar rose to near a three-year high and the British pound scaled $1.40 for the first time since 2018 on optimism about economic rebounds in the two countries and after the U.S. dollar was knocked by disappointing jobs data.

The U.S. currency had been rising in recent days as a jump in Treasury yields on the back of the so-called reflation trade drew investors. But an unexpected increase in U.S. weekly jobless claims soured the economic outlook and sent the dollar lower overnight.

On Friday it traded down 0.3% against a basket of currencies, with the dollar index at 90.309.

The Aussie rose 0.8% to $0.784, its highest since March 2018. The currency, which is closely linked to commodity prices and the outlook for global growth, has been helped by a recent rally in commodity prices.

The New Zealand dollar also gained, and was not far off a more than two-year high, while the Canadian dollar rose too.

Sterling rose to $1.4009 on Friday, an almost three-year high amid Britain’s aggressive vaccination programme.

Given the size of Britain’s vital services sector, analysts say the faster it can reopen the economy, the better for the currency. Sterling was also helped by better-than-expected purchasing managers index flash survey data for February.

The U.S. dollar has been weighed down by a string of soft labour data, even as other indicators have shown resilience, and as President Joe Biden’s pandemic relief efforts take shape, including a proposed $1.9 trillion spending package.

Despite the recent rise in U.S. yields, many analysts think they won’t climb too much higher, limiting the benefit for the dollar.

“Our view remains that the Fed will hold the line and remain very cautious about tapering asset purchases. We think it will keep communicating that tightening is very far off, which should dampen pro-dollar sentiment,” said UBS Global Wealth Management strategist Gaétan Peroux and analyst Tilmann Kolb.

ING analysts said “the rise in rates will be self-regulating, meaning the dollar need not correct too much higher”.

They see the greenback index trading down to the 90.10 to 91.05 range.

U.S. dollar

Aussie and sterling hit multi-year highs on recovery bets 4

The euro rose 0.4% to $1.2134. The single currency showed little reaction to purchasing manager index data, which showed a slowdown in business activity in February. However, factories had their busiest month in three years, buoying sentiment.

The dollar bought 105.39 yen, down 0.3% and a continued retreat from the five-month high of 106.225 reached Wednesday.

(Editing by Hugh Lawson and Pravin Char)

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