R&D tax credits for manufacturing businesses

Since I’ve been handing R&D tax credit claims for a living, the companies I deal with the most are manufacturers, something that is also confirmed by the official statistics published by HMRC. Despite this, manufacturing is still an area where large numbers of companies are missing out on claims they are entitled to, either because they don’t think it applies to them, or their accountant has told them so.

Why is that?

There isn’t a single answer, but often traditional manufacturing is seen as “boring”, “nothing new” and a throwback to the past. I’m not just talking about the view from outside either – I’ve lost count of the number of times a small manufacturing business owner has shrugged their shoulders when asked about R&D saying “we just do what we do”. The reality is actually far removed from that – put bluntly if you are still manufacturing in the UK in 2017 you’ve had to innovate and improve just to stay in business!

Before I set up WOCO I was Joint Managing Director of a medium sized manufacturing company in Manchester, so my experience and insight in this are probably explains why we have been so successful with these kinds of business. To qualify for R&D tax credits a business has to demonstrate that they have made an “advance”, i.e. an appreciable improvement, using science or technology by resolving uncertainties along the way. That covers a wide range of activities, and so below I’ve given you some tips on what to look for in a typical manufacturing business.

It’s not just what you make it but how you make it

Improvements to manufacturing processes and efficiency improvements can often be more valuable to you than coming out with a new, ground breaking product.

Many (if not most) factories have accumulated a mix of old and new equipment and processes that are unique to them, so making improvements to them are often by definition doing something that has never been done before.

It may well be that a brand new piece of equipment is available to purchase that will massively improve production, but may come at a cost of hundreds of thousands or millions of pounds. That’s not an option for most small and medium sized manufacturers, so instead a common approach is to apply ingenuity and intelligence to upgrade or improve sometimes decades old machines, or to integrate some new equipment with existing production lines.

I’ve seen numerous examples of modern controllers and software being added to old equipment leading to huge improvements in throughput and quality, and much of this kind of work (even if it was done for you by a subcontractor) qualifies for R&D tax credits.

The product might not change but the raw materials do

Changing sources of supply are a fact of life for many businesses. One example might be that a high quality UK based raw material supplier is driven out of business by cheap overseas competition. The good news for you is that your cost of materials has now dropped significantly, but the new source may well be of sub-standard quality. The result is that new process steps may need to be designed to compensate, and further product testing and validation needed to ensure that the product leaving the factory gates is as good as it always was.

The flip side of that coin is where technology leads to improved materials (perhaps lighter, stronger or more environmentally friendly), that require new processes to work with to ensure your product benefits fully from the potential improvements.

Don’t forget new products, of course

The above points are in addition to the product development processes going on continuously in most manufacturing businesses. The potential for R&D claims may have been missed due to the priority given to production, but developing, testing and improving products and formulations are all frequently counted as qualifying R&D activities.

Recognising this and having some basic procedures in place to record the details of projects and associated costs can significantly smooth the process of actually making a tax credit claim when you come to it potentially a year or more later.

Although useful, such procedures aren’t essential, and WOCO has developed a structured approach that can help clients to reconstruct this sort of data after the fact.

I hope this article has been of value to you. Obviously if you still aren’t sure if your company or clients would qualify, or you just want someone with a deep understanding of both manufacturing and R&D tax credits to actually handle the entire process for you, give us a call on 07752 057553 or e-mail info@woco.ltd.uk!