The printing industry is subject to constant innovation, with improvements to efficiency, quality and sustainability all regularly contributing to sector-wide advancements in science and technology. Many of these advancements are achieved through daily business operations and are not seen as R&D projects by the company.Continue reading
The government-run R&D tax credits incentive is designed to encourage UK companies to invest in the development of new products, processes and services, or improving existing ones. Intended to stimulate innovation in the UK, it works by either reducing the corporation tax payable or granting a tax credit for a company undertaking qualifying activities.
Awareness and uptake of R&D tax credits has grown year on year; as of 30 June 2020, HMRC had received 59,265 applications for 2018-19, compared to 19,335 just five years earlier in 2013 -14 . Whilst recognition of R&D tax credits is clearly growing, many do not realise that there are two R&D mechanisms of recovery; the SME and RDEC schemes. Regardless of which mechanism is used, a company must be eligible to pay corporation tax to benefit from the incentive.
- The Small or Medium-sized Enterprise (SME) scheme is more generous; a company can expect to receive a benefit of between 19p to 33p for every £1 spent on qualifying R&D costs (Qualifying Expenditure). In 2018-19, SME applications accounted for 88% of all R&D submissions.
- Research and Development Expenditure Credit (RDEC), whilst slightly less generous, can generate a benefit of approximately 11p for every £1 of Qualifying Expenditure.
The ability to claim under each of the mechanisms depends on various factors: a company’s size, the existence of any connected parties (the wider corporate structure) and whether the company has received any external funding (such as grants and subsidies). A key differentiator is that the SME scheme is considered notifiable state aid (of which a company can only receive one type of for each project), whereas RDEC is not.
In the simplest terms, a company is eligible under the SME scheme if it has:
- less than 500 employees; and
- an annual turnover not exceeding $100m; or
- a balance sheet total not exceeding $86m.
Given the financial thresholds are provided in euros, to assess eligibility a company needs to convert the turnover and balance sheet total to euros, using the exchange rate at the balance sheet date.
Where a company exceeds these thresholds, it would be unable to make an R&D application through the SME scheme and instead would be required to make an application through RDEC.
Unfortunately, whilst your individual company may initially appear to fit the SME criteria, you will need to consider connected parties. As such, when you are assessing whether you qualify under the SME scheme, it is important to consider a company’s wider corporate structure. Here HMRC refer to two important key terms: Linked Enterprises and Partner Enterprises. In future articles, we will discuss these key terms in more detail. We will also explore the impact of grant funding on a company’s ability to make an application under the SME and RDEC schemes.
The R&D tax credit schemes have many smaller nuances and intricacies. If you have queries about how your organisation fits into this criteria, the Apogee team are always willing to guide you through this.
In recent years, the Clothing, Textiles and Fabrics industry has come under a lot of scrutiny due to the negative impact on the environment from some segments; many deem this to be the result of the ‘fast fashion’ trend, where consumers looks to purchase stylish clothing frequently and at an affordable price.
Conversely, there is another side to the industry, where customers look for garments with specific technical properties and are less concerned with volume purchases or price. Instead, they seek a high degree of functionality; waterproofing, durability, heat or cold resistance and flexibility name but a few of the functions generally sought in performance clothing. With consumer expectations rising year on year, innovation into such garments is prevalent throughout the industry.
The combination of scrutiny and evolving consumer demands has forced companies across the industry to innovate by keeping production costs to a minimum, whilst simultaneously ensuring environmentally friendly, functional products are consistently developed.
Despite this, the industry is often overlooked when it comes to R&D tax credits. Many businesses think they need to be developing the biggest thing since Gore-Tex or inventing garments comprised completely of technical fabrics to be eligible to recover their R&D costs. Although these activities obviously qualify, there is loads of less obvious stuff which also qualifies under HMRC’s intricate mechanism.
In reality, there are countless activities which entitle you to recover your costs and this is the case regardless of which part of the supply chain you are in. Whether you are a designer, pattern cutter, manufacturer or fabric mill, you may be undertaking qualifying activities. A few examples of what HMRC would consider R&D include:
- Developing new materials, fabrics and textiles to achieve specific properties; for example, high degrees of temperature resistance or flexibility
- Adapting existing materials or fabrics for a new purpose
- Integrating existing materials and components (like zips) to create a new, functional garment
- Developing new production processes to improve your output, or reduce waste and carbon footprint of your operations
- Implementing software systems to improve your back office operations by reducing human input through automation
- Trialing new combinations of materials
Even if these activities are being carried out overseas, as is often the case in the industry, providing the costs are incurred by a UK Limited company, they are eligible. Unfortunately this is at a slightly lower rate of recovery, which is where the mechanism can start to get a little complicated, but a good R&D consultancy would be happy to guide you through these intricacies.
If you are in the clothing, textiles and fabrics industry, hopefully this post has helped you realise there is a good chance some aspect of your business activities will qualify you to recover costs through the R&D scheme. If you’re wondering if you’re eligible, feel free to contact either myself or one of my colleagues. Between us we have submitted numerous applications for the sector, with a 100% success rate, so you know you’ll be in safe hands!