R&D Tax Credits in Manufacturing Industry
The most recently published data on R&D tax credits shows the manufacturing sector was responsible for 22% of all R&D claims made as of March 2020. This amounted to almost £2bn in R&D tax credit relief.
It’s not too surprising, as the manufacturing sector contributes significantly to the UK economy. The nature of the industry also makes it ideal for undertaking qualifying R&D activity due to its focus on products and production processes. If your client sits at the head of a manufacturing business, they may have a lot to gain by pursuing an R&D tax credit claim.
Why manufacturing is important for R&D
According to Make UK, formerly the Engineering Employers’ Federation, the UK manufacturing sector employs 2.7 million people and contributes 11% of the economy’s Gross Value Added (GVA). Crucially though, their statistics also conclude that manufacturing is responsible for producing 65% of all business R&D. With the sector only producing 22% of R&D tax credit claims however, it seems many manufacturing companies are missing out on these benefits.
Manufacturing work often goes hand in hand with research and development endeavours. Developing a new product or process, or making improvements to existing ones, are what HMRC will look for in a manufacturing R&D claim. However, R&D within the manufacturing sector is often costly due to the consumption of materials. By extension, this means the trial and error process can potentially incur greater losses for manufacturing sector businesses than other industries. Manufacturing businesses are also often likely to reinvest money from an R&D claim into further qualifying R&D work.
Looking to the future, the Annual Manufacturing Report 2020 reveals manufacturing businesses are confident about their R&D opportunities. 84% of businesses in the sector feel that making their business more climate-friendly will allow them to make beneficial changes to how they operate. Furthermore, 81% of UK manufacturing businesses say that incorporating digital technologies will enable them to access new markets. These changes are likely to bring about further technical innovations.
Notable UK manufacturing subsectors
Manufacturing covers an extensive range of businesses across the UK. These can be roughly grouped together based on the products they produce and the markets they serve. According to themanufacturer.com, the following sectors are some of the most prominent in the UK, with their corresponding statistics:
- Electronics - directly accounts for over 800,000 jobs. 95% of electronics businesses in the UK, equaling close to 6,000 businesses, are SMEs.
- Food and Drink - contributes 400,000 jobs to the UK economy. This is the largest manufacturing sector in the UK in terms of annual turnover (£21.9bn). Predictions are that food and drink manufacturers will require an influx of new products in the coming years. A qualifying R&D project in this sector could also be an improved version of an existing food brand, for instance Coke Zero etc.
- Energy - responsible for 137,000 jobs as well as approximately 500,000 indirect jobs. Indirect jobs come about incidentally as a result of manufacturing projects. For instance, increased demand for certain materials leads to factories needing more workers.
- Textiles - the UK is the third-largest textile employer in the EU. This sub-sector employs more than 340,000 people across over 79,000 businesses.
- Aerospace - 128,000 direct jobs and 140,000 indirect jobs. Although an area of the UK economy that was heavily impacted by the Covid-19 pandemic, previous productivity growth implies a bright future. The UK has 18% global market share in aerospace, the largest amongst all European countries.
- Automotive - 18 of the world’s top 20 automotive suppliers are based in the UK. 169,000 jobs are found in the automotive sub-sector.
Manufacturing is broad in its applications and as such, there are many types of projects that employ manufacturing practices. Here are some of the major ones:
- Food and drink
- Fuel products
- Printing and publishing
- Transportation equipment
- Chemical products and artificial fibres
- Metal products
- Electrical equipment
Complications to be aware of when claiming R&D tax credits
- Fixed Assets: Fixed assets are long-term tangible assets that a firm owns and are not expected to be sold within a year. Labeling a cost as a fixed asset can potentially complicate a claim, as most fixed assets are not claimable under the current schemes.
- Prototypes: Development of prototypes qualify for the R&D tax credit scheme. However, if a prototype goes on to be purchased by a consumer, it cannot be included in your client’s claim.
- Directors’ Remuneration: Directors may choose to be compensated with dividend payments rather than a salary due to their tax benefit. However, dividend payments are not eligible to be included in an R&D claim. The topic of directors’ remuneration will vary from business to business, so it's worth discussing with your client. For instance, if the company director is very involved in R&D, it may be more beneficial to simply increase their salary as wages are claimable as qualifying R&D costs.
Prepare an R&D tax credit claim with made.simplr technology
As a manufacturer, your client will appreciate making their R&D tax credit claims process as efficient as possible. Made.simplr’s software includes a host of automation and management tools. Integration with Xero accounting software allows your client’s data to be transferred across seamlessly.
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