Approved Accounting – R&D Tax Credit Experts
The UK has an outstanding legacy in engineering and remains a hotbed of innovation, producing solutions on a world stage in sectors such as manufacturing, construction, and communication.
Engineering is essential to the country’s economic and industrial growth, generating over £1trillion each year and employing 18% of the country’s workforce. With statistics like that, it’s easy to see why the government offers a generous tax incentive for engineering projects.
Any engineering SME firm that undertakes R&D projects is eligible to make a claim for R&D tax relief. It can be awarded as a payable tax credit of up to 14.5% of the claim or offset this as future tax relief. The project however must meet strict criteria set by HMRC.
With the skills shortage currently faced by the sector, we at Approved Accounting understand how important it is for engineering firms to invest in new talent. In that context, tax credits can help to fund vital recruitment drives and secure future projects. We believe that R&D tax credits should form an intrinsic part of financial and strategic planning for all engineering SMEs. We’re dedicated to helping our engineering clients take full advantage of the financial rewards available, in order to move their business forward.
Read on to find out more about the tax relief for engineering firms, and how our team of experts can help your SME maximise its R&D tax credit claim.
Which engineering sectors qualify for R&D tax relief
Engineering touches every industry, solving technical problems, evolving processes and driving innovation. R&D tax credits are available to firms in a multitude of different sectors, including:
- Aerospace Engineering
- Agricultural Engineering
- Biomedical Engineering
- Chemical Engineering
- Civil Engineering
- Computer Engineering
- Construction
- Data Engineering
- Electrical Engineering
- Geological Engineering
- Marine Engineering
- Mechanical Engineering
- Manufacturing
- Industrial Engineering
This is by no means an exhaustive list, so if you are in doubt as to your company’s eligibility, feel free to contact us for advice.
Which engineering projects qualify for R&D tax credits?
In order to qualify for R&D tax credit, projects must meet the government’s strict four-point qualifying criteria. HMRC’s definition of R&D is “work that advances overall knowledge or capability in a field of science or technology.”
In our experience, that pretty much defines all engineering projects!
By its nature, engineering is in constant pursuit of solutions to technical problems and improvements to current products and processes. From the moment a project moves from the concept to the research and development stage, it is eligible for R&D tax relief.
In order to meet the criteria, your engineering project must:
1. Identify a technological advance
- The advancement should be for the benefit of your field as a whole.
- The advancement may be in relation to a new or existing product/process/service.
2. Start from a place of technological uncertainty
- The technological advance you identify must encounter uncertainty, which has yet to be overcome. You will be required to prove that the uncertainty existed.
3. Seek to overcome the technological uncertainty
- You will be required to detail your methodology, including research, analysis, prototyping and testing.
- You must show that the intelligence to overcome the uncertainty could only have come from within the course of your research, and not from existing knowledge or capability.
- A crucial point to remember is that you may still qualify for tax relief even if you fail to find a solution. If the work you undertook constitutes R&D, it is still eligible.
4. Prove that the solution could not be reached by another competent expert
- You will need to explain why the solution could only be solved by your team of experts. If your advancement could have been easily worked out by another professional in your field, it may not be eligible as R&D.
Which stages of an engineering project qualify as Research and Development?
To ensure your R&D claim is not rejected, you must be clear on the work that constitutes research and development under the government’s definition. HMRC defines the start of a qualifying project as the moment research begins to solve the technical problem. So it excludes the ideas and market research stage.
The qualifying part of the project ends when a usable solution is presented, or when research ceases having failed to find a solution. That excludes the pre-production and eventual commercial application. Do remember, however, any research that resumes after pre-production and before commercial application counts as a qualifying cost.
While the detail involved is certainly not beyond a keen engineer’s mind, putting together an R&D tax claim can be a drain on time and resources. We often find that some work and expenses can be overlooked as a result. Approved Accounting can help you to identify all qualifying stages of your project with ease, to save your effort and boost your claim.
Which costs qualify for engineering R&D tax credits?
During the qualifying stages of a project, there are a number of direct and external costs that are eligible as part of an R&D tax credit claim:
- Staff salaries for those directly engaged in the enhanced work, including administrative staff
- Pension fund contributions for staff directly engaged in the enhanced work
- Subcontractors (usually at a reduced rate of 65%)
- Utilities
- Consumables
- Software
- Trials
- Prototyping
- Independent research
The following types of expenditure are not eligible for R&D tax credit:
- Capital expenditure (although, there are separate reliefs available in some cases)
- Production and distribution of goods/services
- Marketing
- Cost of land
- Patents and trademarks
How do you calculate engineering R&D tax credits?
Claiming R&D tax relief
First, you must determine which stages of your project constitute R&D as per HMRC’s criteria. You will then need to work out your allowable costs and multiply this figure by the current rate of 86%. On your company tax return, this additional figure is added to the normal 100% of costs deducted from your annual profit.
Claiming R&D tax credits
If your firm is not in profit and claiming a payable tax credit, you must work out your allowable costs and multiply that by the R&D rate, which is currently 10%. It increases to 14.5% for R&D intensive SMEs, i.e. those whose qualifying R&D expenditure is 30% or more of their total expenditure. This figure must be included in your corporation tax return.
Your claim must be filed along with your annual Company Tax Return (CT600). You will be required to compile a technical justification report, which details your R&D projects and the allowable costs, sometimes called ‘enhanced expenditure’. Alternatively, if your business operates as a going concern, you can claim a payable R&D tax credit of up to 14.5%. Claims can be backdated by a period of up to two financial years.
What does it cost?
We will only take a commission if your engineering R&D claim is successful, based on the tax benefit you receive. Our standard rate is 15%, however, depending on the size of the claim we will be pleased to negotiate that with you.
