R&D tax credits are a fantastic government incentive to reward companies for investing in innovation. If your manufacturing business develops new products, processes or services you may be eligible to claim under this scheme.
To be eligible your company must be trying to solve scientific or technological uncertainties. This means working on projects where the solution isn’t obvious to an expert in your field.
The scheme reduces your corporation tax bill or gives you a cash payment if your company is loss making. R&D tax credits can boost your cash flow and fund future innovation.
There are two main schemes depending on your company size:
- SME scheme – for smaller companies
- Research and Development Expenditure Credit (RDEC) – for larger companies
The credit rate varies between schemes. Under RDEC, companies can claim a tax credit for qualifying R&D activities with accounting periods beginning before 1 April 2024.
HMRC will review all claims so proper documentation is key. Keep detailed records of your technical challenges and how you tried to resolve them.
In manufacturing, qualifying activities might include:
- Developing new manufacturing techniques
- Creating new products
- Improving existing production processes
- Finding environmentally friendly alternatives
Many manufacturers don’t realise their everyday work qualifies as R&D. If you’re overcoming technical challenges through testing and experimentation you may be eligible.
Eligibility Criteria for Manufacturers
Manufacturing companies can access tax relief through R&D programmes but you need to meet specific criteria. Make sure you understand which costs qualify so you can claim R&D tax relief effectively. The qualifying activities must address scientific or technological uncertainties in your manufacturing processes or products.
Industry-Specific Considerations
For manufacturers, qualifying R&D activities will involve developing new products, improving manufacturing processes or creating innovative materials. Your project must seek an advance in science or technology through the resolution of scientific or technological uncertainty. This includes:
- Creating prototypes or developing new production techniques
- Improving existing products through material innovations
- Designing more efficient or environmentally friendly processes
- Solving technical challenges in manufacturing
Not all manufacturing activities qualify. Routine quality control, cosmetic changes or market research don’t meet the criteria. Your R&D project must involve genuine scientific or technological challenges that aren’t easily solvable by a competent professional in your field.
SMEs vs Large Companies
The R&D tax relief schemes are different depending on your company size:
SMEs (Small and Medium Enterprises):
- Can claim up to 33% of eligible R&D costs
- Less than 500 employees
- Annual turnover less than £100 million or balance sheet total less than €86 million
Large Companies:
- Can claim up to 13% through the RDEC scheme which gives significant corporation tax relief
- More structured application process
- Different qualifying expenditure calculations
Both SMEs and large manufacturers can claim for staff costs, subcontractor expenses, materials and software directly related to R&D activities. Remember only companies chargeable to UK Corporation Tax can qualify for these tax incentives.
How to Claim
Understanding how to calculate your R&D tax credit is key to maximising your company’s benefit. The calculation depends on your qualifying expenditure and the expenditure incurred during your R&D activities. It also depends on which scheme applies to your business.
Qualifying Expenditure
When calculating your R&D tax claim you must first identify all qualifying costs. These will include:
- Staff wages directly involved in R&D activities
- Subcontractor costs (65% of payments to external workers)
- Materials and consumables used in the R&D process
- Software required for research activities
- Utilities such as power, water and fuel used in R&D
Each of these costs must relate to qualifying R&D activities undertaken during your accounting period. Note, capital expenditure doesn’t qualify for R&D tax relief but you may be able to claim capital allowance separately.
To maximise your claim keep detailed records of all R&D projects including timesheets, invoices and project documentation. This evidence will support your qualifying expenditure calculations and be invaluable if HMRC requests further information.
RDEC
The Research and Development Expenditure Credit (RDEC) scheme applies to large companies or SMEs working on subsidised projects. This scheme gives a payable tax credit calculated at 20% of your qualifying R&D expenditure for accounting periods beginning before 1 April 2024.
RDEC works differently from the SME scheme:
- The credit is recorded as income in your accounts
- It’s subject to corporation tax
- The net benefit is approximately 15% of your qualifying expenditureYou can use an R&D tax credit calculator to estimate your claim value before submitting. Many manufacturers find the cash benefit far outweighs the cost of the claim.
For RDEC claims you’ll need to show how your projects sought to achieve a scientific or technological advancement through resolving uncertainties. This evidence forms part of your claim calculation and submission process.
The Claims Process
The R&D tax credits claim process requires planning and communication with HMRC. Understanding the documentation requirements and how to engage with the tax authorities will improve your chances of a successful claim.
Documentation and Compliance
Proper documentation is the foundation of a successful R&D tax credit claim. You should keep detailed records of all qualifying projects including technical reports that outline the scientific or technological uncertainties addressed. These records must show how your work seeks an advance in a field of science or technology for tax purposes.
Track staff time spent on R&D activities through timesheets or project management tools. Financial documentation should separate qualifying expenditure from routine costs.
From January 2024 if you’re claiming for the first time you must submit a claim notification form to HMRC before you submit your full claim. This new requirement helps HMRC manage claims more efficiently.
Consider creating an R&D compliance folder with:
- Project descriptions and objectives
- Technical challenges faced
- Staff involvement records
- Financial documentation
- Relevant correspondence
Engaging with HMRC
Having a good relationship with HMRC will streamline your R&D tax credit claims process. When communicating with HMRC be transparent about your R&D activities and respond promptly to any requests.
With more scrutiny of R&D claims now the current climate it’s essential to professional engagement. Consider appointing a dedicated contact person who understands both your technical work and tax requirements.
If HMRC asks questions about your claim don’t panic. This is often part of their verification process not a problem. Provide clear factual responses supported by your documentation.
Some manufacturers find it beneficial to work with specialist advisors who can present your claim in the best possible format and represent you during HMRC enquiries. They understand both the technical and financial side of R&D claims.
Sector Guidance
Different industries have different R&D requirements and opportunities for tax relief claims. Knowing how national insurance contributions affect your R&D tax relief claim is critical for financial planning. The challenges and qualifying activities vary significantly across sectors so how your claims are structured will vary.
Manufacturing
Manufacturers can claim R&D tax relief for many activities that seek technical improvements. You can include costs related to new production techniques, material testing and process optimisation for any period up to 31 March 2024.
Common qualifying activities include:
- Designing new production tools or methods
- Creating prototypes and samples
- Testing new materials
- Improving production efficiency
- Environmental friendly manufacturing processes
Your claims should focus on the technical uncertainties overcome during product development. For example, solving material tolerances or bespoke machinery modifications would likely qualify.
Engineering companies should document all experimental work, even failed attempts. These demonstrate the technical uncertainty requirement that HMRC looks for in successful claims.
Software and Digital
Tech companies can claim for new software systems or significantly improving existing ones. Your qualifying activities might include new algorithm creation, new programming techniques or integrating complex systems.
Key claimable projects often involve:
- New software architectures
- New algorithms
- Solved system compatibility issues
- Custom software solutions for industry challenges
- Cybersecurity improvements
Remember routine software development doesn’t qualify. Your work must tackle technical challenges that aren’t easily solvable by a competent professional.
The digital economy presents unique opportunities as any company with qualifying R&D can claim regardless of its primary classification.
Energy and Environmental
Energy sector innovations are prime candidates for R&D relief, particularly those addressing environmental challenges. Your claims can include work on renewable technologies, energy efficiency improvements and carbon reduction solutions.
Qualifying activities often include:
- New renewable technologies
- Energy storage systems
- Carbon capture
- Insulation materials
- Waste management
The SME R&D tax relief scheme is particularly useful for smaller companies in this sector, though this applies to periods up to 31 March 2024.
Environmental innovation often crosses multiple disciplines so comprehensive documentation is key. Record all testing phases, especially those measuring environmental impact against existing solutions.
Business Strategy for Manufacturers
Manufacturers can get the most out of R&D tax by integrating innovation into their business strategy. Making R&D a core part of your operations supports both technical progress and financial health.
Innovation Culture
Create an environment where innovation happens for R&D tax benefits. Ask your team to identify problems and propose solutions as part of their daily work.
Set up innovation time where employees can explore new ideas without immediate pressure for results. This has helped many UK manufacturers find qualifying R&D activities they wouldn’t have otherwise found.
Consider cross-functional teams with technical and non-technical staff. These diverse groups often come up with novel solutions to manufacturing problems that qualify for tax relief.
Track all innovation activities. Use digital tools to document experiments, technical challenges and solution attempts – even the failures count towards your R&D claim.
Investment in Skills and Education
Upskilling your workforce has a double benefit: better manufacturing and stronger R&D tax credit claims. Invest in technical training programmes that address industry specific challenges.
Partner with local universities or technical colleges to access specialist knowledge. These relationships can lead to collaborative projects that qualify for R&D tax credits solving real business problems.
Consider apprenticeship schemes that bring fresh thinking into your organisation. The UK government offers additional incentives for businesses that combine skills development with innovation.
Build a team with diverse technical backgrounds. Engineers, materials scientists and software developers working together often come up with innovative solutions to manufacturing challenges that strengthen your R&D claim.
Strategic Planning for Tax Relief Utilisation
Plan how you’ll use R&D tax relief before you get it. Many manufacturers reinvest these funds into further innovation, creating a cycle of development and tax benefits.
Consider timing your R&D investments to fit your company’s financial year. This helps with cash flow and maximises the benefit of tax relief.
Work with your finance team to forecast R&D tax benefits. This allows for better budgeting and ensures innovation projects get funded throughout the year.
Create an innovation fund using your R&D tax credits. Ringfence these funds so they support future qualifying activities rather than getting absorbed into operating expenses.
Other Tax Incentive Schemes for Manufacturing
Beyond R&D tax credits, UK manufacturers can access other tax incentives that reward innovation and technology. These schemes can provide big tax savings when used in conjunction with your R&D claims.
The Patent Box
The Patent Box gives manufacturing businesses a 10% Corporation Tax rate on profits from patented inventions and certain other IP. That’s lower than the standard corporation tax rate and a big opportunity for tax savings for innovative manufacturers.
To qualify you must own or exclusively licensed-in patents approved by the UK IPO, EPO or other approved patent offices and have undertaken qualifying development activity on the patented invention.
The scheme benefits manufacturers that develop and commercialise new technology. When combined with R&D tax relief it can be a powerful tax advantage for your innovation strategy.
Many manufacturers don’t realise they could be eligible for this relief. If you’ve developed unique production processes or innovative products, exploring Patent Box could save you a lot of tax.
At Cottons, we’ve helped manufacturers of all sizes maximise their tax credits.
Get in touch for R&D advice.
