R&D Tax Relief Scheme Changes set to Impact UK Manufacturing
The UK government has made the most significant changes to tax incentives available for research and development (R&D) since their introduction in 2000, in a move set to impact manufacturing.
Announced on the 1 April 2024, the newly formed R&D tax relief scheme is the result of a merger between the SME R&D scheme and existing R&D Expenditure Credit (RDEC). While these changes will impact all industries seeking tax relief, manufacturing is set to be particularly affected, as a sector that invests heavily in R&D.
According to HMRC’s 2023 ‘R&D Tax Credit Statistics’ manufacturing conducts 41% of all UK R&D, claims 23% of R&D tax credit and invests in the area more than any other industry. Manufacturers are continuously developing and researching new technologies, processes and equipment that will streamline and enhance the efficiency of operations. The sector’s growing investment in AI, smart factories, robotics and cloud computing is a direct byproduct of this, all set to be impacted by the tax changes.
Changes to how much UK supply chain manufacturers can claim
In 2023, the RDEC rate was increased, raising the amount that businesses could claim under R&D relief. The rates brought in under the new system are significantly lower than the previous one, which offered relief of up to 33%.
The merged scheme maintains parts of the previous RDEC model, with a 20% headline rate. Credit it taxable meaning that profitable businesses will receive a net benefit of 15%, while those making a loss can claim cash credits of up to 16.2%
Navigating these rate changes will prove a serious challenge for manufacturers, especially for those on the smaller end of the scale. Facing HMRC’s stricter compliance efforts, increased consumer demand and supply chain shortages, these companies will face enhanced pressure.
Changes to contracted R&D relief for UK supply chain manufacturing
The Contract Manufacturing Index (CMI) highlighted that in 2023, the UK market for subcontract manufacturing rose by 7.5% in 2022. The sector has an ongoing reliance on commercial relationships and complex supply chains. This new scheme is going to change Subcontracting rules in a significant way.
The new scheme has introduced rules to determine who benefits from tax relief where R&D is contracted out. Generally the company making the decision to carry out the research is eligible to claim tax relief- for both the cost of subcontractors and in-house costs. But there are exclusions to this rule, where the decision maker does not benefit from the relief.
Exclusions include universities, charities, government departments or overseas entities, which is welcome news for manufacturers involved in global supply chains or the defence or aerospace industry.
Expenditure on contracted out R&D is now only eligible if the work has been performed in the UK. This includes payment for contract workers where the relief requires workers to be subject to NIC and UK PAYE. There are exceptions made to this, but they will require careful consideration by any business that’s included in a supply chain and relies on outsourcing R&D.
Leading UK R&D tax credit consultancy ForrestBrown is offering UK manufacturers critical advice, to protect their R&D investments amid governmental changes. The consultancy urges manufacturers to have the correct systems in place, to quickly adjust to a wave of tax relief changes. The reform has had a tight timeline, meaning some legislation has been enacted retrospectively.
This, in combination with limited guidance from HMRC on implementing new rules can easily result in disorganisation and confusion among manufacturers. Having the right infrastructure in place is essential to weathering this and effectively utilising R&D relief.
“While the introduction of the merged scheme is a step towards streamlining the incentive, the tight timeline to prepare for the changes will have left many feeling unprepared,” says Robin Taylor, Senior Sector Specialist at ForrestBrown.
“The manufacturing sector itself is extremely R&D intensive, and depends on the development of new processes, systems and machines to thrive. The use of incentives such as R&D tax relief are critical for these firms, and understanding how the relief is changing will be of paramount importance for strategic planning in the year ahead.”
The consultancy also suggests manufacturers review their systems for claiming tax relief, in order to preemptively understand what factors may prevent them from optimising claims. This is especially important as new scheme requirements will result in more paperwork for companies, as they need to provide contractors operational details to support overseas work claims.
“Complications around overseas R&D and subcontracting will also impact supply chain relationships for these larger firms, which could discourage businesses from moving to the UK." said Robin. "The government needs to be clear and transparent with larger businesses working within these R&D intensive industries, so they can employ proactive strategies to harness the full value of their investment in innovation.”
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