UK: Credit where credit’s due

Last Updated: 12 October 2004
Article by Julian Thomas

At the heart of engineering is the quest to conquer uncertainty through innovation. This can apply in relation to the laboratory formulation of a new compound or an attempt to exceed the recognised barriers of a manufacturing process. To engineer is to create, and yet there seems to be reluctance in many organisations to explore outside their research or product development departments for innovation that would qualify for the generous UK Research and Development incentives.

So why is it that despite government encouragement to claim the most attractive development incentives ever available to UK industry, many organisations still do not believe that they are eligible to claim? A major deterrent seems to be an under estimation of their innovative activity.

Many organisations would correctly consider that the development of a composite material with a temperature rating 100°K higher than existing materials would qualify. However they may not consider the innovative work required to develop moulding machinery in order that the same material can be utilised in a new product. In a small, integrated department this may seem a fairly straight forward extension to the material development, but it may be less obvious if the machinery innovation is occurring in a different division/ group company, or if the equipment developer is an unconnected organisation claiming in its own right.

In other cases a product development requirement may lead to the first use of a material for a particular application. If experimentation in process parameters is then required to successfully produce a part, this too is innovation. Directed experimentation aimed at achieving significant innovation may qualify even when carried out with existing equipment and parts. An example of this type of improvement is in resistance welding, where significant experimentation has been carried out to optimise electrode life and reduce energy consumption. Had incentives been available at the time this ground-breaking work was carried out, the organisation would not only have gained the benefit of a four-fold improvement in electrode life and a twenty-five percent reduction in energy consumption, they would also have received tax relief on the engineering research time and the cost of electrodes and other materials used up in the experimentation.

To ensure qualifying innovation is not overlooked requires an understanding of the legislation, combined with the engineering experience to identify the innovation.

One reason why many organisations do not claim, or significantly under claim, is that the responsibility for identifying qualifying development expenditure is not given to the right people.

Few company finance or taxation departments have sufficient technological knowledge to fully identify qualifying spend in areas of experimental development such as manufacturing process improvements – this is simply outside the scope of their function. Similarly, whilst many manufacturing engineers and managers with deep technological knowledge may have heard of R&D incentives, they are not familiar with the definition used by the Inland Revenue for this purpose. Many mistakenly believe that they only apply to pure or applied research, missing the fact that experimental development is equally relevant. A combination of skills and knowledge in these areas is therefore required and should be dealt with by a team that has sufficient understanding of how the tax rules work, how to track the related costs and which activities are likely to qualify.

So do you need to be part of a large organisation to make claiming the incentives worthwhile? The answer is an emphatic no; these incentives are designed to help all sizes of innovative organisation, with a relief for large companies and an even more generous relief for small and medium sized companies (SMEs). The SME relief is available to independent companies that have less than 250 employees and, either an annual turnover of less than €40m, or gross balance sheet assets of less than €27m.

So what should an engineer do to ensure that their organisation is making the most of this opportunity? If you are undertaking innovative work then talk to your manager about this incentive. If you are managing innovative departments, initiate discussion with your company taxation or finance department. If you or they are uncertain about qualification, seek advice.

Manufacturing Engineers are often missed out of the review for R&D activities if innovative product introductions and process developments are not recognised as qualifying. Make sure you and your company are recognised for innovative developments and take the credit where it is due! 

What are they, and how much can we claim?

Research and Development tax incentives have been available to UK small and medium sized enterprises (SMEs) for over three years and to large companies since 1 April 2002. The legislation provides for relief in three ways:

  • For large companies, and additional tax deduction for 25% of the qualifying expenditure identified. Qualifying expenditure includes primarily the salary costs (including employers’ NI and pension contributions) of engineers and others directly and actively involved in the R&D work and the cost of consumable stores used up in the research or development process. This yields and effective 7.5%benefit for a 30% taxpayer.

  • For SMEs. an additional tax deduction for 50% of the qualifying expenditure identified. This yields an effective benefit of up to 15% for a 30% taxpayer, with the option o f a significant cash refund for loss-making companies who elect to surrender the benefit of the increased loss.

  • 100% immediate deduction for capital expenditure on R&D. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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