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Markel Tax

27 Apr 2020

R&D Credits for manufacturing

Contract manufacturers missing out on generous R&D tax credit?

The UK supply chain relies heavily on contract manufactures from every geographical region of the country. However small, these businesses manufacture and supply products such as raw materials to the food and drinks industry, API’s (active pharmaceutical ingredients) to the pharmaceutical industry and essential components to the automotive industry to name a few. Therefore, it is an understatement to say that these businesses are pillars to the UK manufacturing sector.

Most large, well renowned, household-name businesses in the manufacturing sector have dedicated resources or have partnered up with third party firms to ensure the full utilisation of any available innovation incentives such as R&D Tax Credits and Patent Box.

However, for most contract manufacturers who are under pressure to ensure order demands are met with the limited resources available whilst also ensuring smooth operation of their facilities, innovation incentives such as R&D Tax Credits are often missed. Now, more than ever, these businesses are under immense pressure to fulfil supply chain demands whilst facing resourcing and other challenges arising from COVID-19.

Businesses carrying out research and development in the form of modest advances in science and technology often don’t even realise that they are entitled to R&D Tax Credits. This is predominantly due to the fact that contract manufacturers by nature are designed to be solution providers to the industry and their customers and, as a result, would consider their daily activities to be routine manufacturing, even though advances are being made in the field of science and technology. Significant amounts of time are spent on overcoming challenges and undertaking tests and trials to mitigate risks and drive away uncertainty. Carrying out such activities would certainly mean that businesses in this sector could be in line for a generous R&D Tax Credit.

Businesses with fewer than 500 staff or a turnover below £87 million can benefit from the small and medium-sized enterprise (SME) R&D Relief. This allows small businesses to deduct an extra 130% of their qualifying R&D costs from the yearly profits as well as the normal 100% deduction, making a total 230% deduction which equates to an additional 33p for every £1 spent by the business on R&D.

For example, a contract manufacturer may have to undertake an experimental batch trial, which would be followed by additional changes to the conceptual framework in order to achieve proof of concept, even before a contract is won, often taking on the financial risk. Even if the contract is won or lost, a contract manufacturer could qualify for R&D Tax Credits for these activities that have already been undertaken - success is not a requirement for R&D Tax Credits.

Other activities would include the development of a new method, product, and improvements to the existing processes, improvements that substantially enhance the existing product or a more efficient process that would lead to lucrative cost savings.

In summary, for an activity to qualify for R&D Tax relief, it must be scientific or technological in nature and there must be a process of experimentation to reduce the technical uncertainty.

Most contract manufacturing companies would develop bespoke products, are enhancing their existing products and/or making significant changes to the products or processes due to legislative or audit requirements. The time spent by the business on these from the point of conceptualising the initial idea to finally achieving a proof of concept and taking a product from an experimental trial to a large scale production, would quality for R&D Tax Credits.

We appreciate the challenges faced by contract manufacturers on a daily basis and our dedicated team of skilled advisers, including engineers and scientists, are here to help you identify and fully maximise the value of your R&D Tax Credits opportunity.

For more information, please contact Shenal Wijetunge shenal.wijetunge@markel.com

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