UK manufacturers are operating in an environment where standing still is increasingly difficult.
High and unpredictable energy costs, pressure to improve productivity, skills shortages, and the transition towards lower-carbon production are all placing demands on businesses. At the same time, developments in automation, artificial intelligence (AI) and other technologies are creating opportunities to work differently.
For many manufacturers, the response is innovation.
That does not necessarily mean developing a completely new product or making a major scientific breakthrough. Often, innovation starts with an immediate commercial challenge: how can we use less energy, increase output, automate a process, reduce waste, or improve performance?
The work undertaken to solve those challenges can sometimes involve research and development (R&D) for tax purposes, even where the business itself might not immediately describe it as R&D.
For many manufacturing businesses, energy is one of their highest costs. While businesses cannot control wholesale prices, they can examine how efficiently energy is used and whether changes to equipment, processes or technology could reduce consumption.
A manufacturer might, for example, redesign a production process to operate at a lower temperature without compromising quality, integrate energy-efficient technology into an existing production line or overcome technical challenges associated with electrification.
Manufacturers are continually having to find new ways to respond to the pressures around them. Whether it is energy costs, productivity, skills or sustainability, the conversation is often about how they can do something more efficiently, differently or with fewer resources.
That problem-solving mindset has always been part of manufacturing, but the range and pace of the challenges businesses are dealing with means innovation is becoming increasingly important.
Improving productivity is another longstanding priority, but rising costs and skills shortages are making it increasingly important. Automation, robotics, and AI can all form part of the answer, helping manufacturers explore how processes can be improved and how existing teams and resources can be used more effectively.
As explored in an article on AI investment in manufacturing, the challenge is not simply whether to invest in new technology, but how manufacturers can translate that investment into meaningful operational and commercial value.
Simply purchasing new machinery or implementing readily available software does not automatically constitute R&D. However, where technical teams need to develop new processes, adapt technology in a way that is not straightforward or overcome scientific or technological uncertainty, there may be qualifying activity within the wider project.
R&D tax relief is not reserved for manufacturers developing entirely new products. Qualifying activity can potentially arise across a range of projects where a business is seeking an advance in science or technology.
Examples may include:
The common factor is not whether something is new to the business, but whether an advance in science or technology is being sought, and there is scientific or technological uncertainty over how it can be achieved.
Taylor Rodwell, Associate Director, said: “R&D often does not carry an R&D label within a manufacturing business. The commercial aim might be to improve productivity, reduce energy consumption, or automate a process, but achieving that objective can involve significant technical problem-solving.
“A useful starting point is to ask what we were trying to achieve, what could not readily be accomplished using existing knowledge or technology and what work we needed to undertake to overcome that uncertainty.”
Skills shortages, particularly in specialist STEM and technical roles, can also prompt manufacturers to consider how technology could help existing teams work more productively, automate processes or capture knowledge.
At the same time, the transition towards lower-carbon manufacturing is encouraging businesses to explore energy-efficient production techniques, electrification, alternative materials, and lower-carbon processes.
Neither adopting automation nor making a process more sustainable automatically makes a qualifying project for R&D tax purposes. However, where these changes present scientific or technological uncertainties that cannot readily be resolved using existing knowledge, qualifying activity may arise.
For example, changing a material, temperature, energy source, or production method may affect quality, durability, production speed, or safety, requiring testing and development to establish a workable solution.
Not every attempt to improve a manufacturing process will succeed.
A new material may not perform as expected, an automated process could prove unreliable, or attempts to reduce energy consumption might adversely affect product quality.
That does not necessarily prevent the underlying activity from qualifying. R&D tax relief recognises attempts to achieve advances in science or technology and resolve scientific or technological uncertainty, rather than focusing solely on whether a project ultimately achieves commercial success.
This can be particularly relevant in manufacturing, where progress is often achieved through testing, prototyping, trial and error, and incremental improvement.
One difficulty with R&D tax relief is that the terminology does not always reflect how manufacturers talk about their day-to-day work.
A production manager is unlikely to say: “We are undertaking R&D for tax purposes.” It is more likely to be: “We need this production line to run faster”, “We need to reduce waste” or “We need this technology to do something it cannot currently do.”
The starting point should therefore be the technical problem, rather than potential tax relief. What were we trying to achieve? What was not readily achievable using existing knowledge or technology? And what work was required to overcome that scientific or technological uncertainty?
Maintaining evidence of this activity and the associated costs is also important, particularly given the requirements around demonstrating qualifying R&D activity and providing supporting information as part of a claim.
Manufacturers solve challenges every day. The opportunity is to recognise when that problem-solving goes beyond routine improvement and involves genuine scientific or technological advancement.
Whether the starting point is energy, productivity, automation, skills or sustainability, businesses may be undertaking qualifying R&D as they develop new ways to overcome the challenges facing their operations.
If your manufacturing business is developing new products or processes, adapting technology, improving production methods or overcoming technical challenges, there may be R&D activity taking place that you have not previously considered.
To discuss whether the innovation taking place within your business could qualify for R&D tax relief, get in touch, or contact your usual Duncan & Toplis adviser.
