The UK manufacturing sector makes up 22% of the value of all Research & Development tax expenditure, yet further research from Make UK shows that it is responsible for 64% of all UK research and development (R&D) activity. 

According to ForrestBrown, a tax relief consultancy, the R&D tax incentive should be working harder to support the sector.

The manufacturing supply chain and the skills gap

ForrestBrown unveiled its strong support for the manufacturing sector with a three point plan to make sure that HM Government encourages innovation across the manufacturing sector:

• Reduce the widening skills gap: enable overseas technical specialists to help manufacturers address the skills shortage, while at the same time, enjoying the economic benefits of R&D in the UK

• Reinforce the supply chain: in order to complete the first step, ensure the supply chain can continue to supply

• Increase manufacturing capacity: removing the capital allowances barrier to encourage greater qualifying expenditure categories

R&D activity must be supported by the government 

ForrestBrown’s Robin Taylor previously spoke to Manufacturing Digital and warned of the perils in neglecting innovation in the manufacturing sector, as well as the importance of digital transformation.

“Manufacturing is a dynamic, globalised sector which is constantly evolving. Given the pace of technical change, investment in R&D is essential for UK companies to stay ahead of the competition. R&D tax relief has helped support valuable innovation in manufacturing for more than 20 years. 

“However, uncertainty around HMRC’s definition of what constitutes subsidised R&D has put a question mark against access to funding for many of the most innovative companies in the sector. HMRC has taken the view that R&D activities carried out to deliver goods and services to customers could be subsidised by those customers when they buy these goods and services. Such an interpretation can significantly reduce the tax benefit available to the company undertaking R&D.  

“Penalising customer-based R&D in this way creates uncertainty for companies across the manufacturing sector, putting investment and jobs in jeopardy, with knock-on effects for the UK’s productivity and global competitiveness. That’s why ForrestBrown has teamed up with trade associations in the sector to resolve this issue with HMRC by reaching a mutually agreeable interpretation which can be presented in clear guidance for taxpayers.”

As the manufacturing sector totals two thirds of all R&D activity in the UK, it follows that government incentives support the industry. 

“With our analysis showing a big gap between the amount of R&D being done and the amount being claimed for, it’s clear that the scheme is missing the mark in some areas,” said David Byrne, Director at ForrestBrown. “Not only does incentivising R&D help businesses themselves, but it also propels the development of the UK as a technological and scientific superpower. However, a favourable economic environment also encourages investment from outside of the UK. Now is certainly a good time to be boosting that following Brexit and the slow recovery of the sector as a result of the pandemic.”