R&D tax credits: what do they mean for engineering firms?

Over 100,000 UK engineering firms are potentially missing out on vital funding that is rightfully theirs. Each year, an estimated £10.2 billion in R&D tax credits is left unclaimed.

According to HMRC:

“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.”

Nonetheless, when thinking about R&D, the first thought often goes to breakthrough innovations with the potential to change the world. But most R&D happens as small wins, often as part of regular activities that businesses do on a day-to-day basis. The R&D requirements for tax purposes are purposefully broad, extending to both scientific AND technology innovation, which makes them highly applicable to firms operating across all engineering disciplines.

Engineering is essential to the UK’s economy. Every year it generates over £1 trillion of the UK’s turnover, employs nearly a fifth of the working population and is responsible for our competitiveness as a country, particularly in motorsport engineering, aerospace engineering and pharmaceutical engineering. But despite engineering firms investing an average of £386,000 a year on R&D activity, a large number of firms are failing to claim back over £100,000 each in R&D tax credits.

And there lies the problem: awareness.

Misconceptions about R&D tax credit eligibility

When you look at who is currently claiming R&D tax credits, the dominant sectors are Information and Communication (22%), Manufacturing (21%) and Professional, Scientific and Technical (19%) – with the majority of claims originating from the SME incentive.

Even though these sectors are dominant in claiming, there are still many businesses that are not utilising this government incentive. To stop you from missing out and help give your R&D efforts a boost, here are some of the common myths surrounding R&D tax credits:

Your activities aren’t classed as R&D

Engineering firms are responsible for solving complex challenges and/or developing next-generation products. Even though R&D may not be your core business purpose, you are continually investing in R&D throughout a project’s lifecycle to conduct feasibility studies or develop prototypes for testing. These activities are usually covered under R&D tax credits.

Your R&D wasn’t a success

It doesn’t matter. If your engineering firm spends money investing in R&D activity you could still be eligible for R&D tax credits, because HMRC does not penalise you for unsuccessful, or aborted projects.

You didn’t make a profit

Again, it doesn’t matter. R&D tax incentives exist to encourage innovation and account for the need to invest before you’re able to turn a profit. Loss-making organisations are still eligible for relief if their R&D activities qualify.

The R&D investment was made overseas

In its 2021 figures, HMRC estimated that £4-7 billion in overseas R&D expenditure isn’t being claimed for. As long as you operate as a registered UK limited company that is subject to Corporation Tax, you may still qualify for R&D tax credits – even if the investment was made overseas. Whilst a refocus of the tax credit scheme was announced by HMRC in April 2022 to ensure a focus on UK-based innovation, the government still recognise the need for UK businesses to conduct R&D outside of the UK i.e. deep-ocean research. HMRC will still reward these businesses with R&D tax relief.

Your business is too small

HMRC operates two R&D tax credit incentives :

SME: for companies with fewer than 500 employees, and not more than €100 million turnover or €86 million of gross assets.

RDEC: for companies that do not meet the criteria for the SME incentive  – often larger companies. SMEs may also be eligible for this scheme if they are subcontracted by larger companies or have received a grant or subsidiary for their R&D project. Read more about the RDEC   .

Therefore, regardless of your company size, there is a scheme to suit.

Your claim is so small, it’s not worth claiming

Since 2019,  we have helped UK businesses claim over £60 million in the benefit they would have otherwise lost to HMRC. We take the time to get to know the businesses we work with, which means we are often able to find more qualifying expenditures than other advisers. Our experienced team of R&D tax specialists, engineers, and science and technical PhDs will prepare the reports and claim documentation on your behalf. Book your free consultation to see how we can help you claim what is rightfully yours.

R&D Work in the Engineering Space 

There are many different areas of engineering that will conduct R&D on a regular basis and can benefit from claiming R&D tax credits including:

• Biomedical engineering: evolution of 3D printed implants, new imaging technologies, robot-assisted minimally invasive surgery
• Aerospace engineering: developing electric aviation for short-range flight, experimenting with new propulsion systems for space tourism
• Material engineering: testing new sustainable materials in Formula 1, developing new types of cables for long-distance energy transmission from offshore wind farms
• Civil engineering: designing new buildings with optimised airflow and energy utilisation to reduce their carbon footprint, developing new procedures of retrofitting buildings to be more sustainable that are more efficient/less cost & labour intensive
• Energy engineering: developing nuclear fusion as a sustainable energy source, designing floating wind turbines to allow wind farms to be built further offshore
• Chemical engineering: designing new types of batteries with high energy density and low weight to be used in long-distance air travel

If your engineering firm comes under one of these categories or has created/improved products, processes, services, systems or devices in the past two years, you may qualify without realising it. To be eligible for R&D tax credits your engineering firm must fulfil three criteria:

Be a UK Limited company that is subject to Corporation Tax.

Have carried out qualifying R&D activities:

• Activities that directly contribute to achieving advancement in science or technology by resolving (or attempting to resolve) a scientific or technological uncertainty
• Certain qualifying indirect activities related to the project such as maintaining specialist equipment used for the project

Have spent money on the following in these R&D projects:

• Direct staff costs such as salaries and pensions of those working on the project
• The cost of any materials used as part of the R&D project, but are not sold to the consumer such as materials to build prototypes
• Any software licenses used in the project can include applications you purchase, commission or develop yourself