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R&D tax relief advice from Smith & Williamson

Published on: 13 June 2019

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R&D tax relief is available to more business processes and design work in the marine industry than many companies are claiming for.

Research & Development (R&D) tax relief has been around for over 19 years and the Treasury continues to redefine and improve the benefit of the relief, particularly for small and medium sized companies. The relief currently provides for a 230% enhanced tax deduction for these companies and if the company incurs a loss, the tax credit payable on the relevant loss is now 14.5%, subject to a cap from next April equivalent to three times the PAYE/NIC paid.

Although it may seem this is an established tax relief, there continues to be confusion in the marine industry around which activities qualify for R&D tax relief.

Paul Duckworth, a Partner at Smith & Williamson, specialising in tax services to businesses states: “In the marine industry many companies need to keep improving their products just to stay afloat. Fortunately, the Treasury understands these developments so offers a very generous tax relief to help those companies who are often sailing into a tricky headwind.”

It is easy to understand why many companies are confused over which elements of their design, development and production process qualify for the enhanced relief.  

Guidance

The guidelines published by the Department for Business, Energy & Industrial Strategy (BEIS) are designed to help companies navigate their way through the changing tides and constant shifts in HM Revenue and Customs (HMRC) policy. They give an example of what could qualify as an R&D project being activities that seek to “make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes”. The HMRC guidance on this is also a helpful starting point in understanding how to piece together R&D claims.

Paul continues: “In my experience, many companies in the marine industry fall into this definition when improving or designing a new piece of equipment, such as a mast, a new hull design or a piece of electronic equipment within or used by the boat.”

However, the complication arises for most companies when understanding what type of project falls within this definition.

Importantly the guidelines go on to state that “if a particular advance in science or technology has already been made or attempted but details are not readily available (for example, if it is a trade secret), work to achieve such an advance can still be an advance in science or technology”.

For most companies making headway through the choppy waters of the development and improvement stages of products noted above will involve the engineering and design teams for a large extent of their time. This time could be eligible for the enhanced relief.

Eligible costs

The main elements of eligible expenditure will be staff costs (including staff expenses) involved in the process. In addition, companies can claim for software and materials incurred as part of the development process. Small and medium sized companies can also claim for subcontracted expenditure. Costs could qualify for relief whether the R&D project has a successful outcome or not.

Direct and indirect

A key development in helping companies claim all their eligible costs is that both direct and indirect activity on a project also qualifies for the enhanced relief. Indirect activities are defined as those costs once removed from the actual staff involved in the project and can include staff in a support function. This area is often overlooked by companies but HMRC has accepted that this can include staff who are involved in a non-technical capacity supporting the engineering team.

Prototypes

HMRC has issued specific guidance on prototypes and how, broadly, the costs involved in developing the first prototype can be eligible for the enhanced relief. The physical costs of the prototype will not however be eligible for the enhanced relief if it is sold when completed.

Working backwards

Many smaller early stage companies who are involved to a large extent in developing new products will often work backwards when calculating their R&D claim. Due to the development nature of the work being done these companies can find it easier to initially list all staff involved and then take out the element of staff or proportion of staff costs where individuals are not involved in any aspect of the development process. These companies find that this helps them identify the maximum amount of staff costs that may be eligible to be included in the claim.

Don’t forget the testing

An important element of any product development is testing that the item works. Quite often the testing of a product will be considerable in the marine industry and a significant amount of time from staff is involved. This will often include shop floor staff where machine runs are stopped to ensure that the new product can be put through its paces or where time is incurred in testing items in an outdoor environment.

Summary

The main element of optimising your claim is to ensure the engineering team understand which aspects of their daily job fall within the BEIS guidelines as eligible for relief. This may be where the engineers cannot work directly from the handbook but are instead having to think outside the box in trying to resolve uncertainty to improve products.

Although the engineers may feel their work is relatively standard, their cost could still be eligible for the enhanced relief. By taking the time to understand the business and the ebb and flow of the work being undertaken, the initial claim estimate can often be increased to obtain maximum cash back under this very valuable tax relief.

The above specialist advice has been provided by British Marine member, Smith & Williamson. For further information on R&D tax credits, visit the British Marine website here