R&D tax credits for engineering firms
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.
Contact us for help with your claim.
Table of Contents
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.
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How do you claim R&D tax credits for engineering projects?
Like all tax relief, R&D tax credits are not entirely straightforward to claim. Unfortunately, we find that many engineering firms are put off by the time, effort and complexity involved.
If you do decide to make a claim then you must have in-depth knowledge of your industry and the technology used, as well as a good comprehension of HMRC’s R&D tax credit legislation. That is why it is invaluable to have the input of a tax expert such as Approved Accounting to guide you through the process.
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.
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 130%. 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 14.5%. This figure must be included in your corporation tax return.
Recent Changes to the SME cap on R&D credit
Up until 2020, there was no limit to the amount of R&D tax credit that SMEs could claim. Due to abuse of the system, the government made the announcement in the 2018 budget that the legislation would change from 1 April 2020. It stated that R&D tax credit would be limited to three times the company’s total PAYE and NIC liability for that year.
Fast forward to the Spring Budget of 2021, SMEs applying for R&D tax credits will be eligible to a maximum of £20,000 in repayments per year plus three times the company’s total PAYE and NIC liability. So, it’s slightly better news for SMEs when it comes to claiming R&D.
The recent changes could prove problematic for genuine claimants that don’t pay themselves a salary as a company director, or employ minimal staff. If this applies to you, then we strongly advise seeking our professional advice to avoid cash flow issues and ensure your claim is approved.
Make a successful R&D tax credit claim with Approved Accounting
Approved Accounting can help you to navigate the manufacturing R&D scheme and make a successful tax relief claim. Should you choose to work with us, this is our tried and trusted process:
We will take a look at your company’s innovation and development projects and identify those that can be qualified as R&D.
We will consult with you and your experts, to understand the technical aspects and activities of the project(s).
We will help you to compile the fundamentals of the report to submit to HMRC.
We will review and analyse the expenditure for the qualifying project(s), then calculate your claim.
With your approval, we will submit the claim as part of your corporation tax return. There is no need for you to process anything, we will do it all on your behalf.
At Approved Accounting, we know the R&D scheme inside-out and will provide professional guidance to ensure the best chance of success for our clients. We will also save you valuable time and effort, so you can get back to doing what you do best.
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.
Approved Accounting can help your engineering firm achieve the R&D tax credit it deserves
If your business is in the engineering sector and undertakes research and development, you could be due a valuable tax credit. As with all tax claims, there is an intricate list of conditions and strict procedures to follow. It can be complicated and long-winded, taking you away from the important job at hand.
That’s where Approved Accounting can take the burden, helping you to process your claim and achieve the maximum tax credit for your project. We live and breathe R&D tax credits and can help you to boost your claim while saving you valuable time and hassle.
Our team of knowledgeable tax experts is ready to answer your questions about tax credits for engineering firms. Contact us at any time, we look forward to hearing from you.
R&D Tax Credits - Frequently Asked Questions
What does R&D stand for?
R&D stands for Research and Development, and can be defined as any work that is undertaken by a company to advance science or technology. In the UK, HMRC rewards and incentivises R&D in various sectors through the R&D tax relief scheme.
What qualifies for R&D tax credit?
R&D tax credits are available to any company, large or small, that undertakes scientific or technological projects that advances its field as a whole. It could be in relation to a new product, service or process, or an existing product, service or process. This includes, but is not limited to, sectors such as bioscience, software development, manufacturing, food and engineering.
Do small businesses qualify for R&D tax relief?
Absolutely. The government R&D scheme is comprised of two schemes, one for SMEs and one for larger businesses. SMEs must have fewer than 500 staff and turnover no more than £86m in order to qualify.
How do you calculate the R&D tax credit?
This is not a straightforward question! The difficulty here is not in the calculation of the credit but in identifying the allowable costs and to what extent these costs can be included. Once this figure is arrived at this is multiplied by a rate of 130% to give you the additional enhanced relief. It is here where some expert tax planning is required as the there are a couple of options available, you can either carry losses forward to offset against future profits, offset against current tax liabilities or use these losses for a payable tax credit at a rate of 14.5%.
How can I apply for R&D tax relief?
You apply for R&D tax relief as part of your annual corporation tax return. It can be made up to two years following the completion of a qualifying project.
What expenditure qualifies for R&D tax relief?
Qualifying R&D expenses include employee wages and NI contributions, subcontractor costs, materials, utilities (such as gas and electric), and software (providing that the R&D project claims reasonable usage). The nature of the expenditure can have an impact on the amount you can claim and in some situations the cost is restricted. You cannot claim for the expense of production, distribution, patents or trademarks.
