What R&D tax credits can mean for component manufacturers

Research and Development Tax Credits were introduced by the Labour government in 2000. Targeted at small and medium businesses (SMEs), with a further scheme launched in 2002 for bigger companies across all industries, including component manufacture.

The right to this tax relief is open to any company carrying out R&D, the definition being broad and inclusive for companies to qualify for eligible costs. For large companies, the Research and Development Expenditure Credit ( RDEC ) entitled the company to 12% of qualifying expenditure as of 1st of January 2018. Other countries had already introduced such a scheme (the USA, France, and Canada for example) before the UK got with the programme.

Diverting Costs to Creation

The rationale behind such an initiative is clear – reducing the cost burden of R&D encourages companies to invest in R&D. Hopefully, this would enhance innovative ideas and practices, thus generating greater wealth for the economy. R&D incentivisation works in two ways. 

Either it mitigates the cost of the absolute volume of R&D expenditure, or incrementally-based incentives, driven by an incremental increase in R&D expenditure over the base figure starting point. Thousands of companies, large and small, have taken advantage of these credits

What impact could these credits have on Component manufacture? This industry is largely concerned with metal and plastic manufacturing services including simple weldments, manifolds and tube assemblies. 

Many component providers build products with bespoke specifications and, as the range and nature of materials being used for these is starting to open up new possibilities, greater research is required in order to explore, analyse and optimise the use of such materials. 

Harnessing Technology 

Advanced technologies such as automation and robotics, both aided by Artificial Intelligence, are helping drive 4th-generation Industry (4.0), creating the reality of smart manufacturing with digital transformation, use of collaborative robots, machine learning and so on.  

If radical changes are taking place in the manufacturing sector as a whole, in the case of component manufacture this is even more accentuated. Making appreciable changes to the existing model of manufacturing may not be ground-breaking but as long as companies are attempting to produce more cheaply, to a greater standard of quality, this is likely to qualify as research and development activity.

Technical challenges involve a lot of uncertainty and a number of rigorous challenges, and it is an inherent part of the process to go through a period of trial and error in order to reach a workable solution and a measurable improvement.

For larger research and development programmes, such as those typically found in the automotive industry, there is a very clear incentive to source funds from tax credits. R&D departments need to be highly competitive and constantly innovating. But small companies are seeing a whole vista of innovation opportunities opening up as well, with digital transformation driving much of them. 

There are many R&D tax credits which go unclaimed, simply because of a lack of awareness of their availability. The government promotes such initiatives, but the onus is on those companies who need that extra R&D ‘bonus’ to search it out as soon as they can so that they can stay at or near the front of the pack in components manufacturing.

Arrange a free consultation with our team of experienced and approachable tax incentive advisors today. At Kene Partners, our mission is to help innovative companies access millions of pounds of government money set aside to foster innovation. Your business could be next.