R&D tax relief conditions to be satisfied for engineering companies

Engineering companies push technological boundaries on a daily basis

Published/updated:

24 April 2020

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You might be developing tools to support safe well intervention in the oil & gas sector. Perhaps you machine complex profiled components from exotic materials within advanced engineering industries, such as aerospace or automotive.

CHANCES ARE, YOU'RE UNDERTAKING ELIGIBLE R&D WORK AND SHOULD LOOK INTO CLAIMING TAX CREDITS.

HMRC's guidelines for what constitutes R&D are certainly extensive, it they're not always clear! It can take a fair bit of time, not to mention head-scratching, to pick your way through the terminology and understand exactly how HMRC defines R&D.

Know the risks.

Claiming for R&D tax credits is complicated. At around 500 pages long, the legislation is difficult to understand and interpret. You also need to know what technical information to include and be aware of any potential technological advances involved. Without all this, you're risking submitting an inaccurate claim.

If your claim is not accurate, you could lose thousands in relief or face the inconvenience of an HMRC enquiry or the pain of substantial penalties. HMRC Inspectors might even pay you a visit and your past and future tax claims could all be scrutinised too.

Technology uncertainty vs technological unknown

One thing HMRC is clear about is that companies must be trying to achieve their goals by resolving 'technological uncertainities' within specific projects. So what's meant by 'uncertainty'?

Well, in the eyes of HMRC, there is a vast difference between technical uncertainties and technical unknowns. Technical unknowns on their own don't count as eligible R&D, which only kicks in when technical uncertainties arise. The distinction between the two essentially comes down to whether or not a problem can be readily resolved by a competent professional. If it can, then it isn't a technological uncertainty. R&D only begins when conventional knowledge has been applied and exhausted, without a resolution to the problem.

FOR EXAMPLE:

An automotive engineering company aims to develop an improved transmission system for use in commercial transit vans. It procures three transmission systems produced by competitors and tests each to qualify the performance. Although the performance of each transmission system is unknown, it is possible to carry out the test using conventional methods. This data may provide engineers with a clear idea on how to develop an improved transmission system.

In this care, the unknown has been resolved (ie the performance of the competitors' systems) and, as established methods were used, this doesn't constitute R&D. However, if, once the unknowns have been resolved, it's still unclear how the engineers will develop a more efficient transmission system, then this becomes a technical uncertainty and R&D begins!

Trial and error

Another minefield on the fine line between eligible and ineligible R&D is trial and error! If you think of trial and error as experimentation using routine methods, then when it's used to remove unknowns that precede R&D it's ineligible, but if it's used to resolve technical uncertainties that form part of R&D then it is eligible.

FOR EXAMPLE:

If an engineering firm is using trial and error to establish the best tooling material for a given application, this wouldn't be considered eligible R&D. Why? Because the company knows that with this trial ti will find the best material for its purpose.

If, instead, a company uses trial and error to determine how different parameters affect fundamental material properties, and this knowledge hasn't been documented in the open domain, then this is R&D. Why? Because in the second example, trial and error is being used to generate new knowledge.

Process improvement

Advancements in a company's processes only qualify as eligible R&D if they're geared towards advancing science and technology, not simply increasing profits.

FOR EXAMPLE:

If a factory installs new machines to improve production processes, but is then forced to carry out major adaptations to resolve technological uncertainties before this improvement can be seen, then this is eligible R&D. However, if process improvement is carried out purely for commercial gain - such as improving the processes using standard methods with a view to increasing production rates - then it doesn't count as R&D.

SLIPPERY STUFF, AND THIS IS JUST THE TIP OF THE ICEBERG WHEN IT COMES TO THE MANY SPECIFIC DEFINITIONS OF ELIGIBILITY ON HMRC'S WEBSITE. NO WONDER COMPANIES FIND APPLYING FOR R&D TAX RELIEF ON THEIR WON QUITE SO DAUNTING AND CONFUSING.

Don't miss out - make sure you investigate your eligibility

R&D tax credits provide significant financial rewards to companies performing a broad range of activities. R&D tax relief can be complex and time consuming, but if you choose the most appropriate approach and adviser it can be highly worth your time, but consider your options carefully.

FOR A FREE R&D TAX CREDIT CONSULTATION AND ANALYSIS OF THE POTENTIAL RETURN YOU MIGHT EXPECT FROM YOUR PROJECTS, CONTACT THE ABGI-UK TEAM

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