Tax & admin · 21 September 2020

Research and Development Tax Relief: A powerful strategic & tax planning tool

Research and Development planning,  charts and graphs
The R&D tax allowance can deliver additional tax savings
Research and Development tax relief has been in the spotlight during recent years, but many businesses remain unaware of the extra benefits this tax allowance can deliver. Specialist R&D and Capital Allowance expert, Terry Cheesman, explains more.

The best-run companies regularly assess how their operations would be impacted by unpredictable events, but no one could have foreseen how the outbreak of Covid-19 would impact supply chains across the world. In this strange new world we find ourselves in it’s critical that cash-starved companies consider every opportunity available to them.

The factory and workplace of the future must be resilient to weather any economic storm. The all too familiar sight of empty factories and offices, broken supply chains, furloughed staff and cessation of production is a warning that to independently survive whatever nature throws at us, change is needed.

Many of the technologies listed below are, and can, be applied to manufacturing and office -based environments across functions such as:

  • Shop floor and office automation
  • Remote diagnostics and IoT (Internet of things) applications
  • Preventative maintenance sentinels
  • 3D design simulations
  • ERP and MRP functionality
  • 3D training manuals
  • Digital marketing and CRM integrations
  • Real-time factory to back office integrations
  • Supply chain portal development
The cost of implementing these things has reduced significantly over the years, making the technologies more accessible. And combination funding such as Made Smarter UK and R&D Tax relief make it more attainable than you might think, in providing a de-risking mechanism for business owners.

What are R&D Tax Credits?

R&D Tax Credits are a government incentive designed to reward innovation and accelerate growth in UK Companies. It came into sharper focus in the run up to Brexit and the realisation that the UK, at the current rate of R&D uptake and digitalisation was never going to meet its target of 2.4% GDP invested in internal R&D efforts by 2027.

The government is committed to widening the scope of R&D tax relief to include all things cloud accounting and data management (probably as a short-term emergency measure for a number of years). This, coincidentally, ties into necessity in a post-pandemic world for total data resilience to accommodate remote and home working.

Adapt or Die has never been so relevant. R&D is all about doing things smarter, faster, cheaper, and better by using technology and science in a new, non-standard way.

Case study as we went into lockdown:

Family run manufacturing business, in existence for 17 years and had never made an R&D claim. They made a successful claim in March 2020 for the last 2 accounting periods for 243, 000 physical cash (a lifeline given the economic climate since their biggest clients mostly closed in lockdown: London bars, high street chains and airports).

Below are some of the project areas involved:

  • Tooling and equipment design and development
  • Prototyping, including designing, constructing, and testing products
  • 3D modelling
  • Evaluating and determining the most efficient material profile for products and processes
  • Streamlining manufacturing processes through automation
  • Integrating materials to improve product performance
  • Developing novel and innovative control programs
  • Development of second and third generation products
  • Scaling up of production processes
The business owners have available land to expand the production facility.

 

Maximise your tax relief with Research and Development Allowances: When R&D and Capital Allowances Meet

Whilst R&D tax relief has been in the spotlight during recent years, other forms of tax savings are often overlooked. In fact, many businesses are unaware of the extra benefits that Research and Development Allowances (RDA) can deliver in the form of additional tax savings.

RDAs are a form of first-year capital allowance which allows 100% tax relief on expenditure for assets used for R&D activities.

Surprisingly, RDAS (formerly known as Scientific Research Allowances) have been in existence since 1962 and can significantly reduce your company’s corporation tax. But they are relatively unknown and not enough businesses are taking advantage of this lucrative form of tax relief.

The asset expenditure must have incurred for the purpose of research and development to seek an advance in solving science or technological uncertainties.

Whereas R&D tax relief relates to operational costs such as staff wages, subcontractors, materials etc, qualifying RDA capital expenditure can include the cost of brand new assets, such as buildings in which the R&D is carried out and equipment used to conduct the R&D activity.

For example, you may have spent money on building or refurbishing research and development facilities, created a new IT infrastructure or invested in new plant and machinery, tools testing equipment or even company vehicles.

Unlike mainstream Capital Allowances, an RDA claim can be made on a whole asset, including structure, and setting (everything but the base cost of the land and intellectual property). The asset must be used in the R&D efforts for 75% of some time it can be repurposed or put to commercial use later (no claw back of the relief unless it is sold, scrapped or the subject of an insurance claim).


 
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ABOUT THE EXPERT

Terry Cheesman is a specialist R&D and Capital Allowance expert with national coverage and a business owner within Top 12 National accountancy firm Haines Watts. Terry is also the Finance Director of Changing Streams CIC.

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