Don’t miss out on relief

Many companies are not investigating whether their activities qualify for the benefit say Deloitte. Despite the definition of R&D for the purposes of tax relief becoming more clearly defined, research by Deloitte suggests that companies are still unaware of how wide the definition actually is, or do not involve their technical employees in the claim preparation process. A survey of 560 Small and Medium Enterprises conducted 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 figures are more alarming when analysed by region. 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. Jane Lodge, UK manufacturing industry leader at Deloitte says: “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. With rising costs in energy and raw materials, it is all the more important that manufacturers receive this cash injection.” 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. David Cobb, Deloitte’s R&D service line partner, adds: “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. 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.” Deloitte is advising manufacturers to consider three questions which could help them discover whether they carry out eligible activities: - Have you reviewed your activities since the revised guidelines regarding the definition of eligible R&D were published? New, clearer guidelines focusing on technological challenges were issued in 2004 but many companies haven’t reviewed their activities in the context of this improved definition. - How many technical specialists do you employ? If you employ more engineers and scientists than you would need to merely maintain the status quo there is a good chance they are dealing with the sort of technical challenges that characterise eligible R&D. - Do you make experimental prototypes or run iterative manufacturing trials? This is a good indication that R&D is being carried out and could involve considerable cost that qualifies for the relief