As manufacturing businesses changed their approach during the coronavirus pandemic – some moving to completely new areas of production, many have become eligible to claim Research and Development Tax Relief. Mark Rubinson, Partner, Arram Berlyn Gardner LLP, explains how this works and outlines some of the factors that need to be considered.
In recent months many businesses have found themselves re-purposing, and this has certainly been evident within the UK’s manufacturing and engineering sectors.
We have read how Formula 1 teams have switched to producing respirators, how high-end clothing manufacturers have switched to producing PPE and how food manufacturers had to increase production rates almost overnight. Even the Royal Mint switched production to plastic visors.
However, as accountants and tax advisers who’ve been working within the manufacturing and engineering sectors for more than 50 years, our concerns lie in how businesses are funding these changes.
Many businesses have carried out, and continue to carry out, Research and Development (R&D) in order to re-purpose. Samples and prototypes would have been produced and tested. In many cases, the first, second and third prototypes tend to be insufficient, and as a result, this process can be costly and time-consuming.
A business might have to bring in new and additional expertise as well as produce new tools and equipment which they might have researched, tested and produced themselves. All of this falls into the category of R&D, and in turn within the scope of a possible claim for tax relief, and this is something that not all business owners are aware of.
There are two main types of research and development tax relief, with availability largely dependent on the size of the company.
Small and medium-sized enterprise (SME) R&D relief provides an enhanced 230% deduction from taxable profits for qualifying R&D expenditure.
Where an R&D claim creates a loss, it may be possible to surrender this for a cash repayment, currently 14.5%, which would certainly prove to be a valuable boost to the cash flow of any business in the current circumstances.
Research and Development Expenditure Credit (RDEC) is another valuable relief, available to large companies and SMEs not meeting the criteria for the SME R&D scheme. It is now worth 13% of qualifying R&D expenditure.
However, COVID-19 has created several issues for R&D tax relief, which needs to be factored into any potential claim.
Claims should normally be with HMRC within 12 months of the statutory filing date of the company’s tax return. Where this is not possible in current circumstances, HMRC has advised that it may be able to consider late claims.
Government COVID-19 support qualifies as state aid; business interruption loans (CBILS) for example, could impact eligibility for SME R&D relief, which also sits within state aid rules. CBILS funds channelled specifically towards R&D costs, for instance, rather than being used to support the company more widely, could prejudice such a claim.
R&D repayment claims may not be paid in full where there are other outstanding tax liabilities unless covered by COVID-19 VAT deferral measures. Otherwise, HMRC will offset repayments against other tax liabilities, including those owing under a Time To Pay agreement. It is also likely to offset payment of a credit under the SME scheme against a tax liability, although it has more discretion here and will consider individual circumstances if requested.
To claim the tax credit for a surrenderable loss, it is a statutory requirement that a company is a going concern according to the last published accounts. For many claims, the underlying accounts will have been prepared before the pandemic, so this should not present a problem. But going forwards, this will need appraisal and HMRC advises getting in touch where there are difficulties.
It is a complex area where discussion with a specialist in R&D tax relief is highly recommended. But many businesses are eligible without realising it, and missing out on valuable tax relief at a particularly challenging time.