Commonly, there is a business improvement commitment in most scale businesses so understanding the difference between business as usual and R&D for tax purposes is key.
For scale manufacturing businesses, we work to educate, communicate and improve understanding to achieve best practice in our clients’ R&D processes. By having both a strategic and operational lens on projects, it will be simpler to identify any innovation.
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:
Understanding the structure and management of the business is where we are different. Before getting into the weeds of activity, investing in understanding the holistic structure allows us to act like an extension of your team. We can be that connector between strategy, tax and the operational function of the business.
At a top level there are five distinct areas which R&D claims apply to in FMCG 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.
Read more
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%.
Read more
We were engaged by a large manufacturing business that has over 60 UK sites and 5 different business units. Historically, they took a tax-led approach to their RDEC submission. Our technical experts, all of whom had experience in the industry, performed a deep dive into every business unit and site to get a holistic view of their innovation activities. This resulted in a 6-fold increase in their benefit as well as taking away the effort of technical project write-ups away from site leads.
