Tax relief on the research and development work conducted by engineering businesses is available to be claimed – and we show you how to go about that process.
R&D Tax Credits For Engineering Firms
If your company has attempted to make technological advancements or tried to solve a scientific problem, you could be eligible for a claim.
We explain on this page which types of projects and costs qualify and the support you can receive when you join forces with an R&D tax credits expert such as randd.
In our video, we discuss why engineering is one of the most popular industries for R&D tax claims, and the ways in which we ensure all eligible activities and expenditure are included.
What is R&D in the engineering sector?
Engineering R&D tax credits can be claimed for work that results in the design, build and development of innovative products, processes and services or the enhancement of existing ones.
The attempt does not even have to be ultimately successful but because R&D is critical to engineering and can be expensive to carry out, this Government-funded initiative can provide an important benefit to companies.
Companies whose services fit any of the following descriptions can find themselves working on solving technical problems, developing next-generation products and infrastructure, or devising ways to keep existing assets working, all of which is classed as R&D.
By way of an example, in construction engineering, if a new building is being erected in a built-up area, how can it be achieved safely and in a sensitive way to the surrounding environment?
The following types of engineering business could be eligible for R&D tax credits:
- Aerospace engineering
- Architectural engineering
- Automotive engineering
- Biochemical engineering
- Chemical engineering
- Civil engineering
- Construction engineering
- Electrical engineering
- Engineering for hydrology
- Engineering for manufacturing
- Engineering relating to materials
- Geotechnical engineering
- Green engineering
- Infrastructure engineering
- Marine technology engineering
- Mechanical engineering
- Military engineering
- Motorsport engineering
- Petrochemical engineering
- Pharmaceutical engineering
- Plant engineering
- Power engineering
- Process engineering
- Railway engineering
- Software engineering
- Structural engineering
- Surveying engineering
- Systems engineering
- Telecoms and network engineering
- Transportation engineering
What projects qualify for engineering R&D tax credits?
Examples include:
- Developing innovative designs for bridges and road structures
- Developing unique solutions to overcome restrictions based on a site’s location
- Designing innovative lateral force resistance systems for buildings
- Improving or developing new construction equipment
- Foundation and earthwork design for unique site conditions
- Innovative waste water technology development
- Integrating toxic waste and other waste disposal systems into a building
- Design of green energy infrastructure
- Building new, improved or bespoke heating and air conditioning systems
- Innovative product development using computer-aided design tools
- Development of second-generation or improved products
- Tooling and equipment fixture design and development
- Developing unique computer numerical control programs
- Designing innovative programmable logic controllers
- Designing innovative manufacturing equipment
- Prototyping and three-dimensional solid modelling
- Development of computer models
- Designing and developing cost-effective and innovative operational processes
- Designing, constructing, and testing product prototypes
- Developing processes that would meet increasing regulatory requirements
- Digitising manual machining processes
- Developing specialised tools to meet high-specification product designs
- Changing an existing production process to comply with changing regulations
- Integrating new technologies with legacy back-end systems
And to fulfil the R&D tax credits criteria, the work needs to:
Identify a technological advancement
It must benefit your field as a whole and relate to a new or existing product, process or service.
Start from technological uncertainty
You will need to prove the uncertainty existed and that it has yet to be overcome.
Attempt to overcome the technological uncertainty
You will need to detail your methodology, including research, analysis, prototyping and testing, and show that the intelligence to overcome the uncertainty could only have been derived from your research and not from existing knowledge or capability. Don’t forget you may still be eligible for tax relief even if your attempted solution fails.
Qualifying costs for engineering R&D tax credits
Specifically for the engineering industry, these comprise:
- Salaries of engineers working directly on the R&D. Employer National Insurance contributions and pension costs can also be included
- A proportion of employment costs for other staff who support the R&D engineers
- Contractors hired via agencies
- Costs for development or testing work subcontracted to other firms
- Costs of materials and utilities during the R&D process, including light, heat and power
- A proportion of relevant software costs such as CAD and 3D modelling software used by research and development engineers
- Indirect spend procurement, finance and testing directly linked to the R&D project
Benefits of claiming R&D tax credits for engineering firms
The most obvious benefit of a successful R&D tax credit claim is the money you can recoup, but then what should you do with it? It can be reinvested back into your engineering business in a variety of ways.
You could:
Spend more on R&D activity – This would continue a cycle that will support future R&D tax credit claims – you can make one claim for each 12-month period.
Accelerate business plans – Perhaps fund site expansion or new facilities (e.g. more office space or an R&D laboratory) or the creation of a new product, services or processes ahead of schedule.
Buy a new plant or equipment – This could increase your efficiency and productivity, perhaps by upgrading IT infrastructure, installing a new production line, acquiring machinery or updating phone systems.
Hire new talent – Increase your talent pool with new technical engineering expertise from any level of experience.
Calculating R&D tax credits for engineering firms
There are two separate R&D tax credits schemes for which companies qualify depending on their size and turnover.
For the SME scheme, the business must have fewer than 500 staff and a turnover of under 100 million euros or a balance sheet total under 86 million euros.
But if the company is R&D intensive, i.e. if its R&D expenditure is at least 40% of its total costs, it can claim tax relief at a higher rate.
Large companies, meanwhile, are covered by the RDEC scheme. These firms have over 500 staff and a turnover of more than 100 million euros or a balance sheet total over 86 million euros.
RDEC also covers SMEs which are not available for the SME scheme because they have have received grants or subsidies, or have been subcontracted to carry out R&D work by a large company.
You can find our full guide to calculating R&D tax relief, and our free tax credits calculator, here
Claiming engineering R&D tax credits
SME R&D tax relief means companies are permitted to:
- Deduct an additional 86% of their qualifying R&D costs from their yearly profit, as well as the normal 100% deduction, to make a total of 186% deduction
- Claim a payable tax credit if the company has claimed relief and made a loss; the payable credit is worth up to 10% of the surrenderable loss
- R&D-intensive SMEs can claim a higher payable tax credit rate of 14.5% for qualifying R&D expenditure
Here’s how companies under the RDEC scheme can work out their R&D tax credits calculation:
- Identify the costs that are directly attributable to R&D
- Reduce any relevant subcontractor or external staff provider payments to 65% of the original cost
- Add all costs together
- Multiply the figure by the expenditure credit rate of 20% to get the expenditure credit
Can subcontractors claim engineering R&D tax credits?
As mentioned above, a proportion of subcontractor costs can be included in an engineering R&D tax credits claim when a specific skill set is required that is not available within your own workforce.
This applies if you need to bring in a specialist to, for example, develop a new alloy, experiment with bespoke valves or conduct complicated hydrology modelling.
If you have any concerns about which costs are eligible for an R&D tax credits claim, our expert team can help you by handling your submission to HMRC to ensure your claim is completed correctly.
Expert support claiming engineering R&D tax credits
It may seem like a daunting process to claim R&D tax credits, but that is not the case when an agent such as randd works on behalf of your company.
We have vast experience of submitting R&D tax credits claims in the engineering sector, claiming an average amount of £50,000 for our clients.
Contact us by emailing [email protected] or phoning 01332 477070 and one of our experienced team will set the ball rolling to establish whether you have a qualifying claim.
