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R&D tax credits for manufacturing companies
Manufacturing businesses are constantly pushing barriers as they develop new products, boost productivity, cut costs to compete, and adapt to shifting regulations. And with the Fourth Industrial Revolution taking place, manufacturing is at the forefront of innovation, incorporating automation, connectivity and big data.
Innovation seldom comes without a cost, particularly within the machine-intensive manufacturing industry. However, the benefits of businesses’ research and development (R&D) extend beyond the business, as their breakthroughs advance the wider sector and drive economic growth.
That’s why the UK government aims to lift R&D spending to 2.4% of the GDP by 2027. To incentivise this investment by businesses, the government offers R&D tax credits. This tax relief can reduce a company’s corporation tax bill or provide an injection of cash to offset losses, helping companies manage their cash flow while innovating.
If you’re a manufacturing on the lookout for a specialist R&D partner to assist with your upcoming R&D tax credit claim, EmpowerRD is here to lend a hand.
How can EmpowerRD help with your R&D tax credit claim?
REDUCED RISK
2.4% enquiry rate, with just only 0.3% adjustment meaning your claim is more likely to go through. We have specialists checking every claim before submission.
EXPERTISE IN MANUFACTURING R&D
With specialists who have in-depth knowledge of manufacturing processes, materials, and technologies, we ensure your claim accurately reflects the innovative work you’re doing.
KEEP MORE OF YOUR CLAIM
EmpowerRD’s fees are up to 4x more cost-effective than traditional advisors with only 5% or less of final credit back.
REDUCED RISK
2.4% enquiry rate, with just only 0.3% adjustment meaning your claim is more likely to go through. We have specialists checking every claim before submission.
What businesses are in the manufacturing sector?
Accounting for 9.3% of the UK’s economic output, the manufacturing sector is diverse and evolving. Businesses in this sector include those producing everything from cheese to airplane engines, and fertilisers to prescription medicine. In fact, R&D expenditure for the manufacturing sector for the tax year 2021-22 was £11,415m.
The largest manufacturing industries in the UK include:
Automotive-related
The production of cars, buses, coaches, engines, and other vehicle parts. Automotive manufacturing in the UK has an annual turnover of £67 billion.
Food and drink production
The country’s biggest manufacturing sector, spanning firms manufacturing dairy products, beer and spirits, baked goods, condiments and seasoning, and others.
Aerospace
The production of aircraft and aircraft parts, missiles, rockets, and spacecraft. The UK’s aerospace sector is the second-largest in the world after the US.
Electronic equipment
The production of computers and office machines, optical devices, electromedical technologies, and communications products such as cameras, TVs, and radios.
Chemical production
The production of commodity chemicals for industrial and consumer products. This includes the production of petrochemicals, polymers, and agrochemicals.
Textiles
EmpowerRD’s innovative claims software ensures the claims process is 2.5x faster than using traditional advisors.
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What manufacturing projects qualify for R&D tax credit?
The manufacturing sector is the joint biggest beneficiary of R&D tax credits, accounting for 23% of all R&D claims for the tax year 2021 to 2022.
To qualify for R&D tax relief, a project by a manufacturing business must attempt to resolve a scientific or technological uncertainty to make an advance in its field. Qualifying projects could either develop pioneering products or manufacturing processes or enhance existing ones.
Examples of research and development projects that would likely qualify for tax relief include:
✔ Designing, testing, and trialling new machinery and custom tools to use in manufacturing.
✔ Improving existing machinery and tools to increase productivity, precision, safety, cost and energy efficiency, and sustainability.
✔ Prototyping, modelling, and prototype testing.
✔ Developing innovative operational processes and CNC programmes.
✔ Improving manufacturing processes with automation or robotics.
✔ Digitising or mechanising previously manual processes.
✔ Developing, testing, and adopting new materials.
✔ Creating software or artificial intelligence (AI) for use in optimising manufacturing and developing new products.
✔ Integrating manufacturing processes in new ways.
✔ Incorporating new technologies into existing manufacturing processes.
It’s likely your manufacturing business is engaged in projects that would qualify for tax relief that you may have overlooked.
What type of costs are eligible in a manufacturing R&D claim?
A lot of spending goes into a research and development project, some of which you might not be claiming.
Expenditure eligible for R&D tax relief may include:
Staff costs for project employees, covering salaries, wages, bonuses, pension fund, and National Insurance contributions.
Fees for sub-contractors, freelancers, and agency workers involved in the project.
Materials and consumables directly used in the project.
Purchasing, renting, and developing software, for example for 3D modelling and data analysis.
Proportion of utility costs, such as electricity, gas, and water, that’s related to the project.
Subcontracted development and testing.
Payments to subjects in clinical trials, as in the pharmaceutical industry.
Data licence costs and cloud computing costs (for accounting periods beginning on or after 1 April 2023).
What are the benefits of R&D tax credits to manufacturing companies?
R&D tax credits can reduce the tax burden of manufacturing companies or provide them with a cash credit from HMRC, compensating them for up to 27% of their spending on research and development.
Companies can retrospectively claim R&D tax credits, usually for the two previous financial years.
For accounting periods before 1 April 2024, the UK government runs two R&D tax credit schemes: one for small and medium-sized enterprises (SMEs) and one for larger corporations. However, for accounting periods on or after 1 April 2024, companies will claim through the merged R&D Expenditure Credit (RDEC) and the Enhanced R&D Intensive Support (ERIS).
SME R&D tax relief
Companies qualify as SMEs for R&D tax relief purposes if they and any linked or partner companies have:
- fewer than 500 staff members
- a turnover of under €100m or a balance sheet of under €86m
From 1 April 2023, qualifying companies can:
- If profit-making: deduct an additional 86% of their qualifying R&D costs from their yearly profit, on top of the typical 100% deduction, for a total 186% deduction.
- If loss-making: also claim a payable tax credit worth up to 10% of the surrenderable loss.
- If loss-making R&D intensive SMEs: also claim an increased tax credit of 14.5% of the surrenderable loss.
This means that profit-making SMEs can claim up to 21.5p for every £1 spent on qualifying R&D. Loss-making SMEs can claim up to 18.6p for every £1 spent on qualifying activities, with loss-making R&D-intensive companies able to claim up to 27p for £1 spent.
Businesses qualify as R&D intensive if R&D spending accounts for 40% of their total business expenditure.
In 2020-21, the average R&D tax credit claim made by SMEs was £60,104.
The credit can be received as:
- Cash rebate
- Reduction in corporation tax
- A cash credit from HMRC
- Loss relief
- A compilation of the above
RDEC tax relief for larger companies
Larger companies can claim under the R&D expenditure credit (RDEC) scheme. The scheme is also open to smaller companies that can’t claim on the SME scheme because they’ve received a grant or subsidy for their R&D project or been subcontracted by a larger company for R&D work.
The RDEC is a taxable credit worth a portion of qualifying spending on R&D, set at 20% from 1 April 2023. RDEC claimed above the line, as taxable income, so both profitable and loss-making companies receive the same credit. With the 25% corporation tax applied, the relief is worth 16p for every £1 spent on R&D.
Profitable companies receive the credit as a reduction in their corporation tax bill, while loss-making companies receive it as a cash payment. In 2020-21, the average RDEC claim was £252,000.
Visible as taxable income, RDEC has a positive effect on visible profitability, which can make the company more appealing to investors.
For accounting periods on or after 1 April 2024
New merged RDEC scheme + ERIS
A new merged RDEC scheme for R&D tax relief will be introduced for accounting periods beginning on or after 1 April 2024.
The new programme, sometimes known as the R&D single scheme or simplified scheme, will largely align with the current RDEC scheme, with a headline relief rate of 20%.
As in the RDEC scheme, the credit itself is taxable. For loss-making companies, it will be taxed at the small profits rate of 19%, while for profit-making companies the credit is charged at the standard corporation tax rate of 25%.
This means for loss-making companies, the relief is worth 16.2p for every £1 of qualifying spend, and for profit-making companies, 15p for every £1.
This merged scheme will run alongside the Enhanced R&D Intensive Support (ERIS), which is for R&D-intensive loss-making SMEs. From 1 April 2024, an R&D-intensive SME is a company that invests 30% (40% prior to 1 April 2024) of their expenditure on R&D.
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