Repurposing manufacturing and Research and Development Tax Relief – Could you reduce your company’s tax liability or be eligible for a tax refund from HMRC?

October 27, 2020 Editor

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 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 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.

COVID-19 creates a number of issues for R&D claims:

deadlines: 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 advises that it may be able to consider late claims.

State aid: government Covid-19 support qualifying as State aid, such as CBILS, 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.

other tax liabilities: 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 RDEC 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, though it has more discretion here and will consider individual circumstances if requested.

going concern: 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.

A member of our specialist Research & Development Tax team would be happy to talk you through the R&D Tax claims process, review your company’s tax position and potential eligibility for a R&D tax refund . You can contact them via our main switchboard on 020 7330 0000 or via our website at www.abggroup.co.uk. You can also contact us via our marketing team on 020 7330 0012 who are waiting to take your call.