Manufacturing and engineering businesses, especially SMEs – are missing out on huge cash injections into their company by not taking advantage of the financial gains on offer from two government schemes that want to reward innovative thinking.
Both the HMRC’s Research and Development Tax Credit scheme and UK Patent Box regime offer the means for innovating companies to reclaim back substantial sums in tax breaks which can be re-invested to drive future growth.
The government believes that for any economy to thrive, innovation must be at its heart. The EU states that economies must invest at least 2% of GDP to grow and it is to fuel this direction of travel that underpins why politicians are keen to support companies of all sizes who are prepared to continually innovate.
An opportunity for manufacturing and engineering businesses
As the ninth largest manufacturing nation in the world, it is clear that this is a strategically important sector that can help lead the UK’s efforts. A focus on manufacturing can help to rebalance away from a reliance upon service industries and become a primary driver for economic growth. It is also why a great deal of the work carried out by advanced manufacturing and engineering organisations – both large and small – is exactly what the government had in mind when establishing both reward-based schemes.
The uptake of R&D tax credits continues to expand and recent figures from HMRC show that the current year is on track to exceed the previous annual volume of claims. Expectations are that the 2016-17 total of 39,960 claims lodged with HMRC with a value in excess of £3.5 billion will be beaten in 2017-18. Manufacturing, professional, scientific & technical sectors are likely to account for the vast majority of claims submitted.
Cumulatively, the amount of funds claimed since the scheme launched in 2001 now stands at over £21 billion – a huge sum that has gone back to businesses to further support their growth ambitions. Likewise, the claim figures for the UK Patent Box regime, which enables businesses to apply a lower rate of Corporation Tax to profits earned from their patented inventions and equivalent forms of intellectual property have slowly accelerated in recent times. The latest statistics point to a claim value of over £900 million in the latest fiscal year as organisations begin to seek to optimise the commercial value of their innovation. Manufacturing companies account for the highest value of tax relief reported over the past two years. But in the scheme of things, while we are seeing an upward trend, a surprisingly low number of businesses in all sectors – including manufacturers and engineering firms – are still to realise the tangible benefits schemes such as the Patent Box can deliver. In fact, a recent report from the Intellectual Property Office says that only 17% of companies protect their ‘most valuable innovation’ with a patent. And such findings are supported by figures from HMRC. It discloses that just over 1,000 Patent Box claims have been made so far this tax year, which is a tiny percentage of the 130,000 innovation active companies in the UK. With SMEs accounting for just 4% of the claims made, it is clear that many suitably qualifying small to medium sized businesses are missing out on the opportunity. Indeed, just a small percentage of all companies are overlooking a huge opportunity to benefit from both schemes at the same time. Only 3% of businesses, according to HMRC, are using both the R&D Tax Credit and Patent Box scheme. Yet, by working alongside a specialist and claiming for both schemes, businesses can significantly contribute to maximising the benefit available. MPA Group’s experience not only ensures a business can maximise its claim but also ensures no HMRC rules are breached.
What’s stopping companies?
So, what are the barriers to increasing the level of take-up for schemes that only offer an upside in terms of tax relief that can be subsequently utilised in a positive manner through reinvestment into people, processes and equipment?
Research has highlighted that three potential mis-conceptions need clarifying so that qualifying businesses are not put off consideration of the Patent Box regime.
“I have to choose one or the other”
This is incorrect. Businesses CAN submit claims for the same project under both the R&D Tax Credit scheme and the UK Patent Box. Instead of choosing one or the other, applying under both schemes can deliver a greater financial return for the innovation in question.
“It takes too long”
Patent applications can be completed within nine months and cost as little as £5,000, meaning there’s even more reason for manufacturing and engineering businesses to make sure they’re not missing out. And, considering that the average Patent Box claim is worth around £55,000 and if successful, firms are able to pay a reduced Corporation Tax on profits from the patented item for the lifetime of the patent, it is certainly a scheme worth exploring.
“My innovation doesn’t qualify”
Remember the criteria for patenting are broad and the innovation need not be technology-based to be accepted. To qualify it simply has to be something that can be made or used, in addition it must also be new and inventive.
The rewards for companies that do embark on the claims journey can be significant. 5th Dimension Tooling, which invests in around 20 R&D projects each year, has claimed a number of tax credits against its work in recent years. The cash injection it has received has been used to offset some of the costs incurred in investing in additional equipment and centralising its operations. The result has been the establishment of two new services to customers and the foundation to drive future company growth.
MPA Group has a long track record of assisting manufacturing and engineering organisations, including many SMEs, to compile rigorous and compelling project submissions under R&D Tax Credit and the UK Patent Box schemes. And in some cases both.
We understand what HMRC is looking for and our proven track record for submitting successful claims has seen clients fully maximise the value of their claims. For example, Morgana Systems were able to recover some of their investment in R&D as well as taking advantage of the Patent Box scheme.
The secret is that we employ analysts who originate from the world of manufacturing and engineering. This enables them to speak the language of our customers and quickly extract the proof points needed for an effective claim that rewards innovation in the best way possible – with a cash injection.