Reducing Costs for Precision Engineering R&D

Whether it’s in the engineering, manufacturing or fabrication industry, the fundamentals of precision engineering are the same… to take theory and turn it into reality.

Which is why the typical focus of precision engineering often lies in developing ultra-precision technology to create incredible accuracy, improved quality, greater modernisation, better cost reductions and extended life spans.

It therefore makes sense that the activities conducted within precision engineering are often considered as research and development (R&D); because activities are conducted in order to push the boundaries and achieve further advances within the fields of technology and science.

This R&D qualification means that manufacturing or fabrication businesses that conduct precision engineering can gain access to a government incentive to reduce corporation tax bills. So why is it that this incentive is often overlooked or dismissed?

 

R&D Tax Relief for Precision Engineering Projects

The reason that some manufacturing or fabrication companies aren’t claiming R&D tax credits is simply because they feel that making a R&D tax claim is confusing and complex; that their time would be better spent on continuing their business activities.

In some respects, they are right. Identifying eligible R&D activity accurately is a challenge, simply because the considerations are so broad. However, that definitely doesn’t mean that R&D tax claims should be overlooked. These claims can go a very long way in supporting businesses in continuation of their efforts in precision engineering, by providing financial support that helps to  offset the costs of the R&D activities conducted.

So rather than avoiding the complexities of making an accurate R&D tax claim, it is possible to simply pass the hard work over to R&D specialists. These specialists can then evaluate your projects to establish if R&D activities took place, and then complete the R&D tax claim on your behalf. All you’ll need to do to start the process is identify projects where R&D activities may have taken place so they can be considered by our R&D expert.

To help you do this we’ve put together some helpful information.

 

Are You Conducting R&D Through Precision Engineering?

You may have conducted many projects using the tools and knowledge of precision engineering, however there are only certain projects where the activities conducted are eligible for R&D tax relief.

The R&D guidelines provided by the HMRC say that these projects should seek to extend overall knowledge or capability in a field of science or technology. In other words, if the project is pushing the boundaries of physics, mechanics or electronics, (for example by developing flexible phone screens) then certain costs associated with the development activities could be claimed.

The eligibility for these projects also extends to:

  • Using new knowledge or capabilities to make something new
  • Making improvements to an existing product or process; perhaps making it cheaper, with less waste or with greater reliability
  • Making something that already exists, but in a completely different way

Of course, with many activities in precision engineering aiming to improve tolerances (both individual and stack), improved assembly and dimensional stability then it can be difficult for engineering, manufacturing and fabrication firms to identify which activities are eligible for R&D tax relief.

However, as we’ve evaluated and submitted many R&D claims for precision engineering, we can identify areas when R&D is most likely to be carried out, for example:

  • When it’s necessary to make special tools or jigs to assist in development. Tools or jigs for production are not eligible for R&D claims.
  • The need to make prototypes, perhaps to test new processes, unusual materials or shapes.
  • When the time to manufacture a first of type is greater than a production norm; that is the first process / product taking longer to achieve as compared to the mature, steady state of production.
  • When manufacturing processes are changed to improve the target output, such as conducted to improve a Cpk or Ppk
  • Investigations into process failures. When components or assemblies fail to achieve the required output / tolerances, becoming scrap. The process of investigating the cause of the failure could be eligible as R&D.
  • In service failures, where investigations are also required into identifying and solving the root cause.

If you can identify a project, or particular effort that was made to achieve a solution, or enhancement then that’s a start. For that precision engineering effort to be eligible for R&D tax relief, there would, typically, have to be no obvious solution, or route to success available to your business or in the public domain; basically, the project was started without truly knowing how to solve it, or even if it would be successful. Alternatively it may be that the obvious solution proved unsuccessful or impractical for any reason and there was no credible alternative.

The good news is, that R&D tax relief is based on the costs associated with the development stages, so even if the end product or goal was not realised, the efforts made to overcome the challenge could be eligible. This includes receiving relief on a proportion of the costs, such as salaries of those involved in the development as well as some of the materials used in testing and prototypes – a useful amount that could definitely be put to good use for further precision engineering projects.

So rather than dismiss R&D tax relief for precision engineering, why not use it as an incentive to pursue new and challenging projects; to offset R&D losses from efforts made in the past two years or to help you invest in new precision tool technology.

It all starts with a phone call where you will receive expert, friendly advice that will help you determine if you really can benefit from this useful UK government incentive for precision engineering R&D.

For further information on how much you can receive back, visit this page.

 

Links:

  1. https://www.rd-tax-expert.co.uk/about/
  2. https://www.rd-tax-expert.co.uk/contact-us/
  3. https://www.rd-tax-expert.co.uk/blog/rd-costs-can-i-claim/

What R&D Costs Can I Claim For?

Are you in the process of completing a company tax return? Then you may be looking to determine which R&D costs you may be able to claim for to receive a helpful corporation tax reduction.

Whether the company you are responsible for is currently conducting research and development activities or has carried out development work in the past two years, a basic understanding of eligible R&D costs can help you to gauge the amount that you might receive back for R&D tax relief.

So, whichever industry you operate in, if the company has conducted development projects, you can’t afford to miss out on recouping eligible costs through the R&D tax credit incentive.

Eligible Costs for R&D Tax Claims

If a recent development project conducted contributes directly to seeking the advance in science or technology according to the supporting guidelines and legislation1, then you will be able to claim tax relief on expenditure as listed below. If you’re unsure if a project or previous activities qualify, then you can find out by contacting our specialist R&D tax expert here.

R&D costs that can be claimed for include:

Direct labour costs for those undertaking R&D work

The costs associated with directly employing someone to undertake R&D activities can be included in your R&D tax claim. This includes salaries, employers NI, pension contributions and bonuses. If an employee’s time was split between their normal role and R&D activities, then only the proportion spent on R&D can be claimed.

External staff hire to work on R&D activities

If individual externally provided workers (not companies) are hired to work on the R&D project, then a proportion of salary expenditure can be claimed. This is less than for permanent staff as HMRC assume that the payments to EPWs include a profit element. This profit element must be excluded.

Subcontracted costs for employing an agency or freelancers

If eligible activities on the project have been carried out by a subcontractor or an external agency, then again, it may be possible to claim relief on a proportion of the eligible costs for these sub-contracts.

The eligible costs allowable for subcontracted work is dependent upon the size of your organisation, the kind of subcontractor used and the nature of the contract between the parties. Special rules apply, so in this instance it’s essential to consult a professional R&D tax advisor.

Consumable or transformable materials used for R&D projects

 As the R&D project progresses, materials are consumed within the testing process and prototype development. The cost of these materials may be claimed, particularly if the prototypes are scrapped and not sold. Materials embodied in a finished product, or production tooling, following R&D activities cannot be included in the R&D tax claim.

There are also additional transformable material costs that can be included in R&D claims, including heat, light and power.

Costs for necessary supporting business functions

In addition to the main categories for eligible R&D costs, there are a number of other costs that can be claimed for essential support functions to the R&D project. These include HR, finance, IT and certain software licensing costs and development of special tooling. However, due to the unique nature of each project it’s important to speak to R&D tax specialists to identify all the costs accurately.

How to Make Accurate R&D Tax Claims

Of course, the amount that can be claimed from each of the categories above is entirely dependent upon the nature of the work and the extent to which activities can be considered eligible R&D (under current legislation and supporting guidelines).

That’s why many businesses utilise the expertise of R&D tax specialists who are trained in evaluating R&D projects to extract the optimum value of eligible costs for a business. Relief on these costs is then repaid either as a reduction in corporation tax or a direct payment from HMRC dependent on a number of factors such as the size of the business and whether it is profit or loss making.

Either way, it’s safe to say that relief on the costs for development work conducted will improve the financial standing of a business and help to encourage innovation which drives productivity and performance; making it worth your time to explore what R&D costs you can claim for.

To speak with R&D tax specialists on eligible costs for R&D projects, call R&D Tax North West on 01827 338118 or send an email today.

 

 

Improved UK Manufacturing Processes Lead to Tax Relief

With fiercely strong competition in the manufacturing industry, businesses are now realising that cost cutting isn’t always the answer to gain and retain customers.

For that all important edge over competitors, manufacturing companies realise now more than ever, that meeting customer need is vital. How these needs are met however, is another matter entirely.

On occasion, customer requirements can seem impossible to meet, especially within the manufacturing industry where physical boundaries are set on what can actually be achieved.

However, before dismissing customer requests as just too difficult, many UK manufacturing businesses are turning to a new way of working made possible by a UK Government incentive. By using R&D Tax Credits, manufacturing companies are able to meet customer needs for product improvement without the negative financial impact on company resources.

Are you one of them?

Identifying Alternative Manufacturing Processes

Making enhancements to existing products or processes requires consideration of the financial implications for research, modifications and quality testing.

R&D Tax Credits support UK manufacturing businesses to pursue alternative processes by providing financial incentives that allow them to research and develop products to meet customer need.

The following example highlights how a manufacturing company explored new processes and conducted R&D activities in order to meet a specific request; the business not only succeeded at meeting a new customer demand but also received a significant tax break for their efforts.

Example of R&D for Improved Manufacturing Processes

Customer requirement: A request was made to a manufacturing company for the production of a hose assembly to meet a particular need. The hose needed to be made with a welded joint between the hose and the end connection.

Product enhancement: The manufacturing business did not use welded joints for their hydraulic hoses as they had found welded joints to be unreliable. With apprehension over product performance and no recognised industry solution available, it seemed that there was no choice but to decline working to meet this particular customer need.

Exploring options: After further consideration of the matter, the manufacturing company decided that although they couldn’t use a welded joint, it may still be possible to meet the needs of the customer.

Rather than providing a welded joint for the hose assembly, the company looked into the possibility that the assembly could be manufactured as a single machined component.

Overcoming challenges: The decision to research and develop this new joint was not without issue. The newly machined component would need to achieve all existing functionality of the original component including internal surface roughness, dimensional accuracy and behaviour under stress. Therefore, a number of manufacturing processes to achieve the desired outcome had to be developed and trialled before a candidate process could be identified.

R&D outcome: For this manufacturing business, meeting the needs of their customers did not have an obvious solution. It required dedicated effort to research new processes and develop a suitable and reliable solution that met the needs of both the customer, and the company.

Thankfully, the manufacturing business received advice from an R&D tax specialist that a number of costs incurred from the investigation of alternative approaches could be relieved through R&D Tax Credits. In addition to this, the R&D tax specialist also identified how the business could receive a reduction in their corporation tax as they continued to further develop the manufacturing process in order to deliver a reliable and repeatable component.

Improving Your Manufacturing Processes with R&D Tax Credits   

The R&D activities carried out by the manufacturing company in the above example resulted not only in a new manufacturing process that met customer need, but a valuable long term product. To support the work that had been carried out, R&D tax payment savings also provided financial support by allowing the company to receive tax relief on the costs incurred from R&D activities.

At this point, you may be considering the benefits of R&D tax credits for your UK manufacturing business. Not only is R&D tax relief an incentive to research and improve your products and processes, but it’s also useful for helping to gain that edge over your competitors and retain customers.

Unfortunately, the process for claiming R&D can be complex and requires professional analysis in order to claim the maximum entitled amount. Using an expert in R&D tax that specialises in supporting the manufacturing industry is the most reliable way to achieve your tax relief from the HMRC.

So, to find out if any previous research or development activities in the past 2 years are eligible for R&D tax credits, simply contact our R&D tax credit specialist for the manufacturing industry, Nick on 01827 338 118 or visit our FAQ section for more details.