Welcome to Hamilton Blake Consulting’s guide to R&D tax relief for engineers.
Although we support businesses from many sectors with their tax relief claims, we’re specialists when it comes to R&D relief for engineering firms. This means we’re able to give you advice that’s tailored to your business.
Our engineering clients are able to simply tell us about their projects, in their own words and technical terminology, and we identify which elements of their work is eligible for an R&D claim.
This guide will cover all the key areas relating to R&D tax relief for engineers, including:
- What is R&D tax relief?
- Why is R&D tax relief relevant for engineering firms?
- Why does HMRC reward engineers for R&D?
- What R&D costs are covered?
- How do engineering firms make an R&D relief claim?
- Engineering client case study
What is R&D tax relief?
R&D tax relief is a statutory tax relief scheme operated by HMRC. Businesses that can prove they have conducted research and development are eligible for a reduction in their annual corporation tax bill.
In order to claim R&D tax relief, you must be able to prove exactly how much your firm spent on R&D, broken down into exact costs (materials, staff costs, etc). This is because only certain expenses qualify as R&D spend.
Although research and development may sound broad, HMRC’s definition is quite narrow. R&D is a specific part of a project lifecycle; usually conducted before any construction or development takes place. HMRC will expect to see how a project overcame a technical uncertainty in order to advance knowledge or understanding in its field.
How much R&D relief your firm is eligible for depends on how much you spent on qualifying R&D costs, as well as the size of your business.
- SMEs can deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
- Larger companies may be eligible for a tax credit worth 12% of the company’s qualifying R&D expenditure
You may claim retroactive tax credits for qualifying costs from the last two years, as well as a reduction on future corporation tax returns.
Why is R&D tax relief relevant for engineering firms?
Simply put, the nature of engineering means that many firms are likely to conduct R&D work without realising. A lot of engineering work involves overcoming technical uncertainty, which means that engineering firms are the perfect candidate for R&D tax relief.
Here are some examples of the types of engineering projects that may qualify:
- Exploring alternative materials
- Improving safety, cost-effectiveness, or reliability
- Sustainability, waste management, and reducing pollution
- Improving engineering processes
- Production at scale
Although engineering firms are a great candidate for this scheme, businesses from any sector can claim R&D tax relief. That’s because R&D is about the work you do and not the business that does it.
In other words, the R&D tax relief scheme can benefit firms from any of the engineering subsectors. Whether your firm works in aerospace, petrochemical, geotechnical, or electrical engineering, if your R&D work is innovative, you may be eligible.
Why does HMRC want to reward engineers for R&D?
The R&D tax relief scheme exists as a reward: HMRC wants to thank firms for conducting research and development and to encourage them to keep doing it. The scheme also acknowledges that innovation involves a certain amount of risk-taking. Innovators don’t always get it right first time, which is why even unsuccessful projects may be eligible for the R&D relief scheme.
HMRC wants to ensure businesses keep doing R&D because the innovation it generates is good for the economy. In particular, since the Industrial Revolution, the UK’s capacity for engineering excellence has been a vital factor in the country’s economic success. In fact, in 2018, the engineering sector generated 21.4% (£1.2 trillion) of the UK’s £5.7 trillion turnover.
What R&D costs are covered?
HMRC requires all businesses to pay corporation tax on their profits: that is, income minus any expenses. R&D costs are already a business expense, so the R&D tax relief scheme in effect allows businesses to claim an extra reduction on their tax.
In order to calculate how much to reduce from your corporation tax bill, HMRC needs to know exactly how much your firm spent on R&D. However, not all R&D costs qualify for the relief scheme.
The following costs are eligible:
- Employee costs: salaries, National Insurance contributions, pensions
- Subcontractor costs
- Consumable items: materials, utilities
- Clinical trials
However, these costs don’t qualify:
- The production and distribution of goods and services
- Capital expenditure
- The cost of land
- The cost of patents and trademarks
- Rent or rates
How can engineering firms make an R&D relief claim?
The first step is to choose an expert R&D advice firm to support you with your tax relief claim. Your chosen R&D tax relief firm should have a good working knowledge of your sector and the type of work you do. They don’t need to be engineers, but they should understand the specifics of your projects. For more information about choosing an R&D advice firm, check out our online guide.
Once you’ve chosen your R&D tax relief firm, the claim process should look like this:
- Introductory call: your new R&D tax relief adviser should spend some time getting to know your business, ensuring the working relationship is right for both parties.
- On-site working meeting: Your R&D firm will take 2-3 hours discussing past projects with you. They’ll ask you to discuss your work in detail, so they can identify the elements of R&D. Most R&D firms do this face-to-face, but some will do this via Zoom (especially at the moment).
- Transfer of information: Your R&D firm will need things like invoices and timesheets to prepare the claim for HMRC. They’ll also need to know the exact date the project started and ended.
- Creating and submitting the report: Once your R&D adviser has all the relevant information, they will prepare the report on your behalf. They should request sign-off from you before submitting to HMRC.
- Aftercare: A good R&D advice firm will be on hand to support you after your claim, responding to any queries from HMRC and working with you to prepare any future R&D relief claims.
Find out more about the Hamilton Blake Consulting R&D claim method here.
Case study: Engineering firm developing a new fire-safe cladding
Following the tragic Grenfell fire incident, our client sought to develop a new, fire-safe cladding for use on high-rise buildings.
They analysed existing high-rise buildings in London, using this research to develop a new type of cladding. It was vital this new material was both highly safe, and cost-effective. Due to the varying nature of London’s high-rises, many of which are occupied, our client developed bespoke approaches for the testing, removal, and replacement of the cladding. They are working alongside multiple stakeholders, including Housing Associations, Developers and Private Building Owners.
We worked alongside our client to establish what the baseline of knowledge was in their sector, and then successfully prove which areas qualified as R&D.
Want to find out more about how we support engineers with their R&D tax relief claims? Get in touch.