William Garvey is a Director at Leyton UK.
Creating a culture of innovation and developing new solutions enables manufacturing businesses to stay ahead of the competition. In the current uncertain economic market, this is more vital than ever. The UK currently invests just 1.6% of GDP into R&D, falling below the European average of 2%. Subdued domestic activity and ongoing Brexit uncertainty are threatening headwinds to the outlook for manufacturers in 2019.
Part of the government’s strategy to tackle this is by encouraging tax relief and funding opportunities for companies in the sector. Under the government’s Industrial Strategy, research funding will be increased to 2.4 per cent of GDP by 2027. The government says it will start with an extra investment of 2.3 billion GBP in 2021-22, raising total public investment in R&D to 12.5 billion GBP that year.
R&D Tax Relief
The Research and Development(R&D) tax credits initiative is designed to encourage greater spending in research and development, leading in turn to greater investment in innovation. The way the scheme operates is by reducing a company’s tax bill by an amount equal to a percentage of the company’s qualifying R&D expenditure or by the payment of a credit, again linked to the company’s qualifying R&D expenditure.
A company can only claim R&D tax credits if it is liable for Corporation Tax in the UK but otherwise there are very few limitations. Analysis of the latest HMRC statistics however, suggests that many businesses are still missing out. Although manufacturing as a sector has the largest number of claims for large companies, for SMEs it is outpaced in monetary terms by Professional, Scientific & Technical and Information & Communication. A big challenge is that many smaller manufacturing businesses are unaware that the work they are doing counts as R&D or innovation.
Indeed, analysis of Leyton’s client base has found that 86% of our new manufacturing clients in 2018 came from businesses that have never previously claimed under the scheme.
Innovation Resource
Very little of the funding for R&D comes from white lab coats, petri-dishes or smoking test-tubes. Research and development, as defined by government, covers a much broader set of activities. Within manufacturing this can cover products, processes and computing, ranging from improvements to existing methods or the development of new methods.
We believe organisations in the manufacturing sector are underclaiming due to a lack of centralised oversight on their innovation activities. By carrying out a detailed scoping process, a company can identify how much money they would receive for government funding, grants or tax credits – creating a pool of innovation resource for re-investment to further the continuous innovation culture of the business.
Patent Box Claiming
While claims for R&D tax credits have steadily increased over the past few years, there is far less awareness for another scheme, ‘the Patent Box’, an incentive aimed at attracting R&D investment leading to the creation and active management of patentable intellectual property (IP). Patent Box is in addition to the Research and Development (R&D) tax credit scheme and can be claimed simultaneously. It effectively allows qualifying companies to apply a 10% rate of corporation tax to all profits relating to qualifying patents, instead of the normal 19% corporate tax rate.
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However according to HMRC’s most recent figures, the number of companies claiming Patent Box relief only equates to roughly 3% of the R&D tax credit claim volume. Leyton worked with a FTSE 250 Manufacturer of Soft Drinks to help them realise the potential of their previously unrealised innovations as patents. The company was able to successfully claim for a novel bottle cap in packaging and also a dispense system used in pubs. Due to the complexity of the client, the process took 11 months. However, the second claim took just 6 weeks. The first claim was worth 575,000 GBP to the client with the second claim 1.3m GBP.
British manufacturers continue to lead the world with their culture of innovation and should act now to ensure they don’t miss out on tax benefits that they are owed.
William Garvey is a Director at Leyton UK, a leading innovation funding consultancy. In this column William explores how UK Manufacturers can benefit from tax relief offered in the Industrial Strategy.
