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R And D Tax Credit Rules Still Confusing UK Manufacturers

by Robert Lee,, London

16 February 2007

UK manufacturers are missing out on tens of millions of pounds of Research and Development tax relief, despite recent clarification of the R&D tax credit rules designed to boost uptake of the scheme, new research by business services firm Deloitte has shown.

According to Deloitte, its survey suggests that companies are still unaware of how wide the legal definition actually is, or do not involve their technical employees in the claim preparation process.

A survey of 560 Small and Medium Enterprises conducted by Deloitte last year found that 55% of businesses eligible to claim R&D tax relief were not doing so. Despite being an ‘R&D heavy’ industry, of the 160 manufacturers surveyed, 71% of eligible businesses were not claiming the relief. A third of these manufacturers did not think they carried out R&D whilst 20% were not aware of the R&D tax relief.

The results also revealed large regional variations in the take up of the tax credits. Almost three quarters of manufacturers in the South-West are failing to claim R&D, whilst all manufacturers surveyed in the Midlands eligible to claim R&D tax relief are failing to do so. In the South-East, 63% of manufacturers are not claiming R&D tax relief, whilst the best performing region is the North-East, with 50% of eligible manufacturers making claims.

“The UK Government has recognised the importance of investment in R&D and has introduced significant incentives to encourage UK manufacturers to invest in new and innovative products as they face growing competition from emerging markets. Yet many companies are mistaken that they do not undertake eligible R&D and therefore do not make claims," noted Jane Lodge, UK Manufacturing industry leader at Deloitte.

"With rising costs in energy and raw materials, it is all the more important that manufacturers receive this cash injection," she added.

Deloitte believes that part of the problem for manufacturers comes in identifying eligible activities and appreciating the fact that activities can still qualify even if the company is being paid to perform the work.

“In a normal manufacturing cycle, up to 80% of the total intellectual property in a product is contained in the know-how surrounding the manufacturing process," observed David Cobb, Deloitte’s R&D service line partner.

"It is likely that activities eligible for R&D tax relief are being carried out but this is the sort of activity that is rarely considered by manufacturing companies. Time is now running out for many of these companies as the deadline for claiming the relief for a number of years expires on 31 March 2008 due to a change in the rules last year," he added.

Deloitte is urging UK-based manufactures to review their activities since the revised guidelines regarding the definition of eligible R&D were published in 2004. Furthermore, companies that employ more engineers and scientists than needed to merely maintain the status quo are likely to qualify for the tax credits, as are firms that make experimental prototypes or run iterative manufacturing trials, Deloitte said.

In response to growing criticism that the UK R&D tax credit regime is not succeeding, the government unveiled an initiative last November designed to ensure that small and medium businesses (SMEs) can make use of extra practical support and guidance from HM Revenue & Customs (HMRC) and the Department for Trade and Industry (DTI) to advance their R&D activities.

Under this initiative, HMRC is opening a network of seven new specialist R&D tax credit units across the country, to make it easier for innovative SMEs to take advantage of R&D tax credits.

"R&D tax credits are playing a crucial role in encouraging innovation in UK businesses with more than GBP1.8 billion having already been claimed, since April 2000," John Healey, Financial Secretary to the Treasury, stated at the time of the announcement.

It was also announced last year that UK tax officers would undergo training in an attempt to improve their knowledge of the software development industry and boost the take-up of R&D tax credits by firms in the sector.

The R&D tax credit works by allowing companies to deduct up to 150% of qualifying expenditure on R&D activities when calculating their profit for tax purposes. Small or medium companies can, in certain circumstances, surrender this tax relief to claim payable tax credits in cash from HM Revenue & Customs.

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