The aerospace industry provides a plethora of opportunities for companies looking to develop new technologies.
With pressing issues such as passenger safety in crowded airspace and the aviation industry’s carbon footprint – with air travel accounting for about 2.5 per cent of all human-induced CO2 emissions – there is pressure to develop ways to offset this.
Aviation companies invest heavily in Research and Development (R&D) activities, but they can be costly.
Therefore, companies involved must be aware of the UK’s R&D tax relief schemes and if they meet the eligibility criteria.
What is R&D tax relief?
It is a Government initiative aimed at incentivising and reducing the risk of innovation, by enabling companies to reclaim a portion of their eligible R&D expenses either as a tax credit or Corporation Tax relief.
R&D Tax relief aids companies in tackling scientific and technological hurdles, making it an ideal scheme for businesses in the aerospace sector.
R&D Tax relief is accessible to a broad spectrum of companies in the aerospace industry, from multinational manufacturers to early-stage businesses that produce components for larger vehicles or systems, subject to the scheme’s eligibility criteria.
There are three core eligibility criteria for R&D Tax relief:
- An advance in science and/or technology must be sought in an overall field, not just for your business.
- There must be scientific or technological uncertainty – an expert cannot say if something is technologically possible.
- You must be able to explain the work you did to overcome the uncertainty.
Some examples of aerospace projects that may qualify for R&D Tax relief
- Research into the use of renewable energy sources for aviation.
- Creating and evaluating aircraft designs to enhance performance and fuel efficiency.
- Carrying out research into supersonic flight, encompassing the development of innovative materials, propulsion systems, and aerodynamic designs.
- Improving current systems, components, and software by incorporating new properties and capabilities.
- Researching the use of artificial intelligence and machine learning in aerospace operations.
This is not a comprehensive list, but it highlights that there is no necessity for R&D projects to create something brand new or physical.
R&D projects encompass those looking to improve existing systems or researching Artificial Intelligence (AI) or software.
What costs can my aerospace project claim?
The following is not an exhaustive list of costs you can claim, there are expenses beyond the ones listed that you can claim, and also a possibility that your project may not qualify for some of the following.
Staffing costs
Compensation, including salaries, wages, pension contributions, and national insurance contributions, for staff directly engaged in your R&D activities, including:
- Aerodynamics
- IT Architects
- Materials Scientists
- Test Pilots
- Aerospace, Chemical, Mechanical, and Software Engineers
- Project Managers
It is important to consult an R&D expert who can give you a personalised assessment of which of your staffing costs will qualify.
Prototypes
Certain expenses related to the design and construction of a prototype necessary for testing your R&D efforts are eligible for relief.
However, if you intend to sell your prototype, HM Revenue and Customs (HMRC) will categorise it as a first-of-class product, allowing you to claim relief only on costs incurred in addressing scientific or technological uncertainties.
Consumables
Consumables refer to resources that are expended during the R&D process. This category includes parts, raw materials, chemicals such as solvents and lubricants, fuel, gases, and specific utilities like water, light, and heating.
Typically, the costs of these utilities are allocated based on the extent to which they are used for R&D activities, as opposed to routine business operations.
What if my R&D project uses subcontractors?
Particularly for larger manufacturers, it is common to commission smaller companies to develop products and solutions that will form part of a bigger project.
Often, the subcontractor provides their customer with units on a per-unit basis. In this arrangement, the subcontractor assumes the financial and technical risk of the R&D and may, therefore, be eligible for R&D Tax relief.
The relationship between the contractor and the subcontractor is crucial. A low level of autonomy coupled with high levels of supervision might suggest that the relationship should be classified as an externally provided worker, rather than a subcontractor.
Under these circumstances, the subcontractor would not qualify for R&D Tax relief.
This can be fairly complex, so if you are subcontracted by a larger aerospace company, it is best to consult an R&D Tax specialist who will be able to identify if you are owed any relief.
Equally, if you are an aerospace company that is involved in R&D activities, it is advisable to contact a specialist who will be able to identify the qualifying factors of your project.
Get in touch with our team for tailored guidance on R&D Tax relief for aerospace projects.
