Not just for Biotech – R&D tax relief Case studies

Wednesday, 3rd October 2018

Guest blog by Jumpstart

R&D tax credits can provide significant financial rewards to companies performing a broad range of activities.

The Research and Development (R&D) tax credit programme is one of the best tax-delivered incentives in the UK.  Its nature is very different from traditional tax programmes, and is designed to encourage UK companies to develop new products and services through innovation and technical risk-taking, boosting the competitiveness of the UK in the international market and drawing more investment into the country.

The benefits of the programme include increased cashflow, which is especially important to small, developing companies.  It also encourages development of a corporate philosophy that embraces innovation and improvement, and ultimately leads to the company bringing more products to market and makes it less susceptible to competition from other companies.

In order to qualify for the R&D tax relief, the company must show that the project and its associated costs meet the eligibility requirements. In order for the technical claim to be eligible it must meet three criteria: project content, technical advancement, and technological uncertainty.  The project content must be technical i.e. science- or engineering-based. The project must also contribute to technical advancement within its field. It doesn’t have to be a large advance; it just has to be shown to be defined and unique. Finally, and possibly most importantly, the project must possess uncertainty that prevents a guarantee of success.

It is important that R&D is viewed throughout the business and not just in a “white lab coats” R&D department.  The eligibility criteria can be met simply by process improvements on an assembly line or by trying to make something that is larger or smaller than attempted before.

Case Studies of Projects

Company A is an agricultural company involved with mushroom production.  The normal production time for mushrooms is eight weeks. However, the company technical expert believes that if he can make changes to the composting operation, through addition of nutrients and by increasing the temperature of the climate control, then he can reduce the growing time to six weeks.  Individually these adjustments seem to be reasonable and there seems to be a good chance of success. The company proceeds with the experimental development of the plant using the technical expert’s rationale. Unfortunately, by fast tracking the composting process the mushrooms grow in environments where there are still active viruses in the manure.  The presence of viruses combined with higher than usual temperatures used to encourage their propagation repeatedly cause an infection of the mushrooms prior to them reaching maturity. Three consecutive trials prove to be a failure.

This project is eligible because it meets the three technical criteria.  It is conducted in a scientific field – agriculture/biology. If mushrooms can be grown 20% faster it would represent a technological advancement.  Although the individual process improvements would be expected to increase production, the combination of the changes did not go as expected. This shows the uncertainty regarding the project.  The labour costs, materials (compost and nutrients), laboratory costs to identify the virus, and power requirements would be potentially eligible for R&D tax credits.  The company has now gained valuable information on the limitation of its process.

Company B is a baker and has a resounding success with their bread products.  The present operation is close to 100% capacity and needs to expand.  This would involve the purchase of additional ovens and the recruitment of extra staff to operate the equipment. An experienced baker suggests that the present system could be improved by making changes to the dough mixture and by increasing the temperature of the ovens.  It is hoped that this will enable the bakery to increase the batch production by 15% without additional staff.  Such an increase in production would defer the purchase of equipment by six months, which would enable the company to purchase the equipment without a bank loan. Trials are set during the weekends to test the mixtures and time reductions. The trials are a success and the quality of the product is maintained.

This project meets the requirements of the R&D tax credit.  It is an advancement in the field of food chemistry because it makes the production process more efficient. It had technical uncertainty due to increasing the temperature and decreasing the time; the product may have baked unevenly – crisp on the outside but uncooked on the inside.  It required changes in the formulation to make sure that this did not occur and the pilot trials were required to ensure that the product could be produced on a large-scale manufacturing operation.  All costs associated with the trials are potantially eligible including staff time, equipment used for the portion of the work, materials for the production of bread, and power costs.

Company C wants to reduce the price of its drill bits so that it can be competitive with a foreign manufacturer that has recently started competing in its market. By looking at other worldwide suppliers, they manage to find a US company that will provide newly developed equipment that will produce the drills 40% faster.  They also source a supplier in Germany that will provide higher quality carbon steel for the same price as their present supplier.  The result is an improved operation that gives a higher quality drill bit that can be produced 40% faster with considerable cost savings to the company therefore making them more successful and outperforming the competitor.

This project fails to meet the requirements of the R&D tax programme.  Although there is an advancement in the product and the company becomes more successful, it is based upon off-the-shelf supplies.  The suppliers may have developed new products such as more efficient drill bit equipment or a higher grade of steel but these were supplied and the company manufacturing the drill bits is not involved in the R&D. There is no scientific uncertainty in the process. The improvements are financial arrangements and increased quality of equipment and supplies. Although the company’s performance improves, they are not eligible.

Talk to Jumpstart

For companies applying for R&D tax credits, the most vital part of the process is being able to correctly and precisely identify the components of its projects that HMRC consider eligible.  Due to the subtleties of the legislation in this area, many companies find it beneficial to use a specialist R&D tax credit consultant like Jumpstart for their claims.

Jumpstart is the UK’s leading R&D tax relief specialist. Our technology-based approach to claim preparation is undertaken by PhD qualified Analysts with extensive industry experience in their own specific fields of science or technology. Our Technical Analysts are not only industry sector experts, but equally knowledgeable when it comes to the HMRC’s legislation, ensuring maximised, accurate and robust claims.

In a climate where the value of claims being disputed by HMRC has grown by almost 400% over a twelve-month period, the fact that we offer free enquiry defence as standard on every claim we prepare and submit gives our clients a cast-iron security.

To arrange a free consultation to discuss your own R&D tax relief specific circumstances, to identify how we can work with your team to improve the claim process and realise greater value for your business, contact the Jumpstart team on 0131 240 2900 or helpinghand@jumpstartuk.co.uk.