When a precision-led business is famous for being bespoke, it will tend to work with customers who have a very specific requirement. This can make it more complex to establish whose innovation the activity belongs to. How people are paid and the contractual position of the arrangement are factors that will matter when deciding who can benefit from innovation-led incentives.
At the heart of it, R&D for tax purposes needs to satisfy two core tests:
R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology, for example:
Material science will tend to be a feature in most projects when considering R&D for tax purposes , either in the end-product or in the tools or the technology used to simulate the functionality of the solution.
By using the breadth of knowledge across our team, we will work with you to identify core projects that should be considered for inclusion in an R&D tax relief submission. We use our tax, legal and intellectual property experts.
At a top level there are five distinct areas which R&D claims apply to in precision manufacturing businesses; staff costs, subcontractors, externally provided works (EPWs), software, consumables e.g. heat, light and power. This data is used extensively in your R&D claim, find out more about each type below.
The majority of most R&D tax relief claims are based around staff costs. This includes people directly involved with the activity and others who are indirectly involved.
An example of direct costs would be a specific materials engineer – they tend to be defined, technical roles who are the doers of the project. A common misconception is they have to be scientists and academics, this is incorrect. If they are directly contributing to the R&D effort, then there is a good chance their costs can be included.
Indirect staff are people who are also involved in supporting the R&D project such as administration, finance, and personnel activities where they enable the R&D to happen. These costs are usually overlooked but have a rightful place in the claim.
Where you may not have the expertise in house, you may rely on a third party to help with part of the R&D process. These costs are qualifying expenses for the R&D tax relief scheme. For overseas subcontractor costs new rules apply for accounting periods starting on or after 1 April 2024.
Like subcontractors, you may not have directly employed staff but want to have resource for a particular role who act in the same way as employees – i.e. under your care custody and control. These costs can form part of the claim. For overseas EPW’s costs new rules apply for accounting periods starting on or after 1 April 2024.
The proportion of heat, light and power that is used for the R&D project is also qualifying expenditure.
Any software used directly in the R&D is a qualifying cost. For accounting periods on or after 1 April 2023 costs related to datasets and cloud computing can also be claimed.
The SME and RDEC schemes will merge into a single scheme for accounting periods starting on or after 1 April 2024.
With the SME R&D tax credit scheme you can currently claim tax relief of up to 33% on your qualifying R&D expenditure incurred up to 31 March 2023. After this new rates will apply.
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The Research and Development Expenditure Credit (RDEC) rate has increased over the years, companies can get over 10% of their R&D expenditure incurred up to 31 March 2023 refunded. Then this will increase up to 15%.
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Our client is a precision engineering business, specialising in the automotive sector and working with market leading manufacturers. After benefiting from R&D tax relief for several years, we undertook a review of their contracts with third parties. We were able to identify opportunities in their contracts that could bring more projects into scope and allow them to own the intellectual property associated with the development.
