R&D Tax Credits and CAD

R&D Tax Credits and CAD

When many people think of Computer Aided Design (CAD), 3D renderings of complex engineering prototypes come to mind. However, CAD software is extremely versatile and has changed the design process across countless industries for the better.

The introduction of CAD made in-house research and development feasible for many organisations that previously lacked the resources to dedicate towards it. This is in part due to the fact that it is no longer necessary to invest significant resource (in terms of both time and materials) in designing, prototyping and proofing physical concepts, as CAD enabled these activities to be accomplished in a virtual setting with no material cost.

While physical prototypes are often still necessary further down the development road, the ability to design and test ideas in a digital environment alleviates much of the cost associated with the creation of new products. Because of this, CAD software has provided many SMEs with the tools they need to innovate, without requiring substantial reserves or capital.

That brings us to the relationship between R&D tax credits and CAD. In many cases, costs associated with testing, and the development of both 2D and 3D designs, can be recovered through the R&D mechanism; the caveat being the nature of the CAD activity.

If you’re using CAD to develop bespoke 2D or 3D designs in which the optimum design is not immediately obvious, or where there is uncertainty as to whether a suitable design can be developed at all, you are likely eligible to recover your costs.

Additionally, if you’re testing potential designs in the software and regularly forced to iterate and modify their configuration as a result, you will find an R&D tax credit application incredibly worthwhile.

If your company uses CAD and you’re unsure whether you should be applying, or if you’re already submitting applications but believe there’s money being left on the table, get in touch with one of our team – as always, we would be happy to help.

R&D Tax Credits: Linked and Partner Enterprises

Linked and Partner Enterprises

Linked and Partner enterprises are terms used by HMRC to define the nature of a relationship between companies with common shareholders. If you have common shareholders in your company, it’s important to understand how these work, as it may have an effect on whether or not you’re able to recover your R&D costs at the more beneficial SME rates (19%-33%), or at the lower RDEC rate (10.5%). We’ve translated the HMRC language to make it easier to understand how HMRC would categorise your relationships.

 

Linked Enterprises

Linked enterprises are defined as those in which one enterprise is able to exercise control, either directly or indirectly, over the affairs of another . Put simply, where a company has a majority (greater than 50%) of the shareholder’s voting rights in another enterprise, it is considered “Linked”. Though this is the most common method of determining whether a company is linked, there are actually several “tests of control” to determine whether one enterprise directly or indirectly controls another. For example, having the right to appoint or remove the majority of the members of the administrative, management or supervisory body. These tests of control would need to be applied to each company’s specific circumstances and are a topic in and of themselves; we will delve deeper into these “tests of control” in future articles.

For cases where a company has a linked enterprise, you need to aggregate all linked company figures to assess eligibility. So you would combine the entire turnover, balance sheet total and employee numbers of all enterprises when assessing eligibility.

 

Partner Enterprises

A company is considered a partner enterprise when one entity owns over 25% of the capital or voting rights in the other, but the two are not linked (as above). In cases where a company has a partner enterprise, a relevant proportion of their figures must be included when assessing its position against the eligibility criteria. For example, if a company has a 30% corporate shareholder, it would include 30% of the shareholder’s turnover, balance sheet and employee totals.

 

To illustrate these differences, here is an example:

Company A owns 70% of Company B which owns 25% of Company C. Company A wishes to make an R&D Application.

 
  • Company A and B would be considered linked enterprises. Company A would therefore need to aggregate 100% of Company B’s figures when assessing eligibility.
  • Company B and C would be considered partner enterprises. Further, when assessing eligibility, Company A would need to consider 25% of Company C’s figures.
 

Autonomous Enterprises

An autonomous enterprise is any entity that is not considered partnered or linked. As such, a company is autonomous if another company owns less than 25% of its shares, or if it owns less than 25% of another company. There are some specific instances in which a company may still be considered autonomous, despite an enterprise exceeding the 25% threshold. For example, if a venture capitalist firm or institutional investors own more than 25% of the shares, but less than 50%, a company could still be considered autonomous and thus not need to consider the figures from the other entities (providing they are not linked to one another). The relaxation of the 25% threshold is limited to cases of specified investment enterprises that play a positive role in business start-up and financing . See the Company Eligibility page on our website for more examples of entities which enable a company to retain its autonomy.

Eligibility is a complex topic and whilst we have not exhausted all of the nuances, it has hopefully served to clarify the main differences between autonomous, linked and partner enterprises. Of course, if you are exploring an R&D tax credit application with Apogee, we will do all of the necessary eligibility assessments for you, so you can feel safe in the knowledge that you’ll be getting the best recovery through the correct avenue. If you’re unsure of what category you’ll fit into, get in touch; we’re here to help. 

R&D Tax Credits in the Printing Industry

R&D in the printing industry

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

R&D Tax Credits: An Introduction to Eligibility

R&D Tax Credits Construction

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 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
  • Either:
    • 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.

R&D in the Clothing, Textiles and Fabrics Industry

R&D Tax Credits Clothing Innovation

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 exclusively 5* rated reviews from our clients, so you know you’ll be in safe hands