Sector spotlight – Advising manufacturing clients on R&D tax

If you have manufacturing clients on your books, R&D tax relief is likely to be a familiar concept to you – but are you au fait with the complexities of qualifying expenditure?

Manufacturing is, unsurprisingly, one of the sectors which comes up most often in R&D tax claims due to the wide scope for technical innovation and strong links with the scientific industries. HMRC data states that manufacturing accounted for 21,000 claims in 2021/22, worth £1.5 billion.

Despite that, it is deceptively challenging for firms without in-house R&D expertise to advise these clients fully. 

Contracting out

Some manufacturing operations are vast, involving multiple businesses and several stages. 

While great news for industry collaboration and R&D as a whole, it can cause confusion from an R&D tax perspective. Under the latest rules, businesses which bear financial risk – typically those which fund the R&D, even if they do not carry out the work themselves – are eligible to claim relief for qualifying expenditure.

You and your client will need to be clear as to which party invested in R&D and whether R&D was intended to fulfil the contract – as lack of clarity could mean that the party which carried it out was the risk-bearing party, thereby being eligible to claim relief in your client’s stead.

Application vs innovation

The major challenge in advising manufacturing clients on R&D tax claims is the issue of defining true R&D. 

For tax relief purposes, HM Revenue & Customs (HMRC) requires that the project seeks to address or overcome an uncertainty in either a scientific or technical field. In practical terms, it must seek a new process, product or material to be eligible.

Many manufacturing projects do just this, but many others simply apply an existing process or item in a new way, which is rarely eligible for R&D tax relief.

Your client will need you to guide them on whether their project truly qualifies before preparing a detailed claim.

Enquiries from HMRC

Issue number one leads smoothly into the second challenge you might face when advising manufacturing clients – assessment by HMRC.

Manufacturing has a lot of scope for successful R&D tax claims, but it also has a lot of room for erroneous claims for projects which don’t meet the technical definition of R&D.

For this reason, you may find that your client’s claims are targeted for enquiry by HMRC – which is now investigating as many as 20 per cent of claims.

Working with randd, you can seek external advice from a trusted partner, passing that benefit onto your client and reducing the likelihood of an enquiry, certainly one that results in a penalty.

Our HMRC enquiry support service is designed to help you and your client successfully defend their claim.

Need advice on advising the manufacturing sector on R&D tax? Contact us and we can help.

Adam Bointon