Making manufacturing innovations understandable to HMRC when making an R&D tax relief claim
In this guide, we are looking to help innovative businesses translate the advances they make in manufacturing into R&D tax relief claims.
It can be challenging for HMRC to understand the difference between routine improvements in manufacturing and something that is truly ground breaking.
When accountants or innovative businesses also fail to understand the best way to frame these advances, many valid R&D tax relief claims can be rejected.
This is why we want to help you understand how to frame the innovative work undertaken in such a way that the advance is clear for all to see.
If you have any questions about the R&D work you conduct in the manufacturing sector, be sure to speak to our team today!
What is meant by R&D for tax purposes?
If we are to fully understand the difference between routine work and R&D, it is vital to get a clear awareness of how HMRC defines R&D.
Is significant in the sector
Cannot be readily deduced by a competent professional
Involves some degree of technical uncertainty 4
For R&D to be eligible for an R&D tax relief claim, it must seek an advance in science or technology that:
Features work conducted during the financial year
Routine tasks or any changes made to products in order to make them more commercially or aesthetically appealing are unlikely to be eligible unless those changes meet all four of the above criteria.
What is the difference between routine work and R&D?
Having examined HMRC’s definition of R&D and considered where advances are likely to arise, it is necessary to draw the line between routine work and R&D.
This is because some of those core uncertainties might be resolved easily through some routine improvements or maintenance and doing this will not automatically be considered R&D.
For instance, calibrating machinery so that it reverts back to its original operational capacity is unlikely to count as R&D if the way to do this is readily apparent.
Calibration and maintenance should be left out of consideration for an R&D tax relief claim, as these are typical parts of the work and would not involve an expert opinion.
Who is the competent professional and why are they important?
The expert opinion will be delivered by your competent professional.
They will be the person who heads the R&D and is the one who devised the parameters for the project in the first place.
Not everyone involved in the R&D will be considered a competent professional, as it is not uncommon for much of the work undertaken to be performed by those with less experience.
The crucial factor is that the competent professional should be the one driving the innovation and seeking to resolve issues.
You will know the competent professional based on their experience and qualifications.
There is no fixed list of qualifications that make someone a competent professional, so it is possible that someone who has worked in manufacturing for decades but never acquired a formal degree could still qualify.
Likewise, a demonstrable track record of innovation can be similarly impactful.
This can be evidenced to HMRC through documented involvement in similar technical challenges, patents or technical reports, contemporaneous test records or prototypes and clear technical explanations of why certain approaches were tried and why they failed or succeeded.
The key thing to keep in mind is that a competent professional should be able to explain the innovation without relying on jargon.
This feeds into the core challenge that is faced by R&D tax relief claims in manufacturing and that is finding a way for people with limited technical experience to understand why something is innovative.
As such, the competent professional needs to be heavily involved in dictating the R&D tax relief claim so that their ability to describe the advance can be demonstrated.
How important is a strong technical narrative?
Manufacturing is one of the sectors that benefits most from the technical narrative.
This is because the technical narrative is an excellent place to fully establish what the existing state of science and technology was and how the project has made significant improvements.
It might not be clear to an outside person why a certain manufacturing technique cannot be done faster or more efficiently, so noting the standard at the start of the project is important.
As R&D tax consultants, we specialise in crafting technical narratives that address the concerns of HMRC to ensure that they understand the value of the R&D tax relief claim being submitted.
It does help to have some core points covered and this is where collaboration becomes essential.
We aim to address the following in every technical narrative:
Why did those attempts fail and could that failure have been anticipated?
If the project was successful, what resulted in its success?
For the technical narrative itself, it is necessary to highlight failed attempts to resolve the uncertainty as much as it is to highlight anything that was ultimately successful.
As it cannot be expected that every HMRC agent is an expert in all sectors of R&D, having a clear timeline of failed attempts serves to illustrate that the work done was challenging.
When highlighting failure, it is imperative that the logic behind the attempt is clearly defined and understood.
This serves to prevent people from being wasteful in their R&D tax relief claims by trying things that were obviously doomed from the start.
Remember, even failed projects can be included in an R&D tax relief claim provided they meet HMRC’s definition of R&D.
Are R&D tax relief claims worth it financially for manufacturing businesses?
The perk of the R&D tax relief scheme is that innovative businesses get a cash injection based on their own qualifying expenditure.
This money is not dependent on the commercial viability or success of any innovation and is awarded for the sake of science and technology itself.
Importantly, the cost of consumables is covered in an R&D tax relief claim, meaning that you can be ambitious with the way you approach the innovation without fear that you are jeopardising your business’s finances.
If an item was destroyed or irreparably altered by the R&D work and therefore cannot be sold on for commercial gain, then it can be included as a consumable.
Similarly, the cost of any fuel, power or water that is used in R&D can be included in an R&D tax relief claim.
If machinery is damaged or destroyed while you are seeking to make a system more efficient or sustainable, then the cost of that damaged equipment will form part of the R&D tax relief claim.
Innovation in manufacturing can often take a long time to pay off in a financial sense, as it tends to lead to small but important increases in output or reductions in costs.
Rather than waiting for that long-term impact to be felt on a company’s finances, R&D tax relief claims provide funding faster so that more innovation can occur.
How can manufacturing innovations be better represented in R&D tax relief claims?
We seek to educate innovative businesses on better ways to approach their R&D to make the compilation of R&D tax relief claims more efficient.
As discussed, there are many potential stumbling blocks for compiling an R&D tax relief claim in manufacturing that are often made more difficult when the claim is approached in hindsight.
Consumables and the time individuals spent working on the R&D should ideally be recorded when the work is being undertaken rather than retroactively calculated.
It is possible to make estimations after the fact and HMRC will generally accept these figures if there is a logic to them, but accurate record keeping can help in the event of an enquiry being raised.
If a business is more focused on R&D than is typical, then this will be especially important as HMRC might view the figures with suspicion if they do not align with what is expected in similar R&D tax relief claims.
This is also true of any attempts to resolve the uncertainty, as having even brief notes that were compiled at the time could give better insight into why the approach was taken and the reason for its failure.
While these notes are unlikely to be seen by HMRC, they can be incorporated effectively in the technical narrative and referred back to during an enquiry.
Is my R&D tax relief claim likely to be subject to an enquiry
The reason we are working to educate those operating in niche sectors on best practice is being R&D tax relief claims from those sectors are at greater risk of facing an enquiry from HMRC.
You may be aware of the historic issues of corruption and fraudulent submissions that cast a long shadow over R&D tax relief claims.
This has led to HMRC tightening compliance to stamp out the influence of bad actors and ensure that only legitimate businesses benefit.
Part of these measures included the introduction of the Mandatory Random Enquiry Programme (MREP).
The MREP means that any R&D tax relief claim, regardless of quality or eligibility, could be flagged for an enquiry.
When this happens, we defend all legitimate R&D tax relief claims for the full amount of the eligible costs at no extra charge.
