Identifying in-eligible clients in Manufacturing
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Something we hear time and again from our clients is that they struggle to identify clients in their client base who would be eligible to claim R&D tax relief. Previously, we’ve tackled the sectors where you might be less likely to find eligibility, but now we want to tackle the top five (according to HMRC’s stats):
- Information and communication (Software)
- Professional, Scientific and Technical
- Wholesale & Retail trade and repairs
Having recently covered software and construction, this time we’re looking at manufacturing. In common with the rest of the top five, the level of eligible R&D to be found in manufacturing is misunderstood, and often overestimated.
In fact, most manufacturing lands more towards the ineligible end of the spectrum. The difficulty here is that manufacturing is such a wide and varied sector—it could describe anything from companies weaving wicker baskets on their kitchen table to companies making microchips in high-tech clean rooms, and everything in between! However, given the huge number of manufacturing companies in the UK, even a small percentage of these doing eligible work would constitute a large number of claims, and it’s this high number of claims from a small proportion of the sector that lands manufacturing in the top. So, join us as we dive into the types of work done by all of the other manufacturing companies that you shouldn’t be claiming for!
Whenever we talk about food and drink manufacturing, we mention the scale of the company and how that is linked to the likelihood of the company doing any eligible R&D. If a company is producing food in a way that could be done in a domestic setting, they won’t have any eligible work. This consideration actually applies to manufacturing more generally; smaller, ‘cottage’ manufacturing companies are highly unlikely to be doing eligible work. Essentially, if the goods are being produced using off-the-shelf machinery and components at a small scale, the company is unlikely to be pushing the boundaries of science or technology.
Moving up the scale, we have seen and spoken to many companies over the years that design and develop innovative new products that aren’t eligible because the work that they do is just the assembly part of the manufacturing process. If your client simply orders in components from their suppliers and then assembles these into products without fundamentally changing them, it’s very unlikely that they will be able to make a claim for R&D tax relief, no matter how exciting or technical the product.
New product development
We’ve written about the eligibility or lack-thereof in new product development before, but it bears repeating—just because a product is new or innovative does not mean that the work to produce it will be eligible for R&D tax relief! In short, no matter how cutting-edge the design, idea or product, if it can be produced using standard components and techniques then the company will not be able to claim R&D tax relief for the development work. This applies even if the product is completely new to the company – if the knowledge of how to produce it is available in the public domain or can be easily worked out using existing knowledge, it’s not eligible for relief.
Tinkering and optimisation
All manufacturing companies devote some time (sometimes a huge amount of time!) to tinkering with and optimising their processes, looking for incremental gains in efficiency, waste reduction, defect reduction etc. This type of work is specifically excluded from the R&D tax relief schemes. To quote HMRC’s guidance “…improvements, optimisations and fine-tuning which do not materially affect the underlying science or technology do not constitute work to resolve scientific or technological uncertainty.”
Established product lines
Finally, anything related to established product lines, short of a complete reinvention of part of all of it, almost certainly won’t qualify for relief. This might be where a company buys a new piece of production machinery to replace existing technology, or tweaks the product in a small way, or redesigns the packaging. If the underlying science or technology of the product isn’t changing, the company won’t be able to make a claim.
Ok, so what can manufacturing companies claim for?
- New product development: Having stated above the NPD is almost always ineligible, it’s worth noting that if the new product requires the company to make an advance in science or technology, and resolve technical uncertainties, then the company will be able to claim for these costs.
- Scaling up: even when a new product has been straightforward to develop and produce at small scale, companies often come up against challenges when scaling up manufacture. Again, if overcoming these challenges requires advances to be made in science or technology the company may be able to make a claim.
- New legislation: Manufacturing companies are often restricted by government legislation as to how and with what components they can produce their products, Therefore, when legislative changes are brought in, they may be required to carry out qualifying R&D to make their products compliant.
- Integration: across all types of manufacturing new raw materials regularly become available, some of which will improve performance of established products or enable new functionality to be added. Where integrating or incorporating these new materials requires advances to be made, the costs may qualify for relief.