On 29th January Tait Walker, and our R&D Advisory Group colleagues from MHA, had a very helpful meeting in London with a senior central policy adviser from HMRC in regard to two major changes proposed to the R&D Tax Relief regime:
- The removal of materials as a qualifying cost in R&D claims where those materials are included in an item which is then sold on to a customer (we strongly believe this change is badly targeted and will impact the economy of the North East unequally compared to some other regions)
- The Advance Assurance process which will be introduced (which we think is a good idea and which we support provided that it ensures that applicants ask informed questions so they get the right answers!)
In both cases, HMRC are actively seeking feedback about why they should, or should not, make the changes proposed.
In respect of the proposed removal of materials as a qualifying cost where they are sold on to a customer, the feedback from HMRC was as follows:
- The primary reason for the change is that they have seen, mainly from large company claims, that a significant amount of items that are produced in factory production and then sold to customers are now being included in claims, with the justification being that there was a trial of a new production process occurring at the same time.
- They had not aimed the changes at producers of “first in class” items – but they accepted that they would be caught.
- They accepted that this would take us back to the position that existed prior to 2009 whereby, if a first in class item was developed as a speculative project (i.e. a proof of prototype) and that item was then sold, the material costs would have to be excluded.
- They accept that this change will reduce the benefit of R&D claims mainly for engineering and manufacturing businesses, but they also accept that they had not looked at the impact on a regional basis in regards to where the impact on manufacturing or engineering would be greatest.
We believe that this is highly detrimental to engineering businesses who invest in new prototypes. For example, we have assisted numerous companies to claim in relation to entirely speculative projects where having proved the prototype worked (at significant cost and financial risk to the company), a buyer then approached the company with an offer to purchase the prototype.
This change will impact many companies who engineer or manufacture “first in class” or “prototype” items and will materially reduce their R&D Tax Relief claims. For companies who are developing new first in class or prototype items, this can often represent a significant element of their qualifying costs under the current rules.
It will also impact heavily on areas where manufacturing and engineering is a key part of the economy. It is notable that this would include areas such as the North East, the North West, the Midlands, Wales and Scotland, whereas areas that are not heavily reliant on manufacturing, such as London and the South East, would not be affected so badly.
The North East has, for example, more than 10,000 people employed in the Offshore & Marine Engineering sector with more than 50 companies directly in the supply chain and many more indirectly involved. Many of these companies develop world leading technology and rely on R&D claims to help to encourage investment in new products and encourage greater R&D staffing.
The good news is HMRC are willing to listen to businesses that will be affected. We have already had feedback from a range of companies across our region which we will provide to HMRC on a no names basis – but we would like more.
If you own, or manage, an engineering business that carries out development of first in class items or prototypes, please complete our questionnaire so that we can feed the results back to HMRC as evidence of why this change is detrimental to manufacturing.
The survey is here:
If you have any further questions regarding HMRC’s proposed changes and your engineering business, please contact Alastair Wilson on 0191 285 0321 or email firstname.lastname@example.org.