Take-up of R&D tax relief amongst UK manufacturers is disappointing and signals serious shortcomings in the Government’s efforts to encourage innovation in the UK. The latest survey from the EEF and CBI reveals that only a fraction of companies have claimed the tax relief, to which they are entitled and only a handful more plan to claim.

According to Deloitte, UK manufacturing is missing out on multi million pound claims each year. The business advisory firm warns that finance directors of UK manufacturers are likely to continue to miss the opportunities because in many cases they either do not appreciate the breadth of the relief or they see the process as difficult and bureaucratic.  In some cases they cannot garner support within the company because the benefit arises in the tax charge whilst most company reward systems are based on increases in profit before tax.

Over recent years, the UK has slipped down the R&D league table behind the rest of Europe and many countries around the world. US and European companies devote 4.9% and 3.7% respectively of their revenues to R&D compared to a mere 2.3% in the UK. In 2002 the Government took action against the flagging record and extended the existing R&D tax regime for Small & Medium sized companies to include larger companies in order to reduce the cost of R&D and drive British competitiveness.

David Cobb, R&D Tax Services partner at Deloitte, said: “We’ve hit a real low in innovation and its time to step up and get back in the game. Giving money back to those investing in R&D makes a lot of sense, but more needs to be done to show UK manufacturers and their finance departments how this can be achieved.”

CBI and EEF research out today shows that R&D tax credits are saving UK companies less than half the amount predicted.  Although the headline benefit is 7.5% for large companies and 9.5% to 15% for small companies, the fact that many R&D costs are not included in the relief takes the effective benefit down below 4%.  This takes it below the “noise” level and so does not attract the attention of the Board.  Despite Government targets to increase UK spending on R&D from 1.9% GDP, to 2.5% GDP by 2014, Deloitte believes a further big push is needed to help UK manufacturers better understand what’s in it for them.

Cobb added: ”The confusion is sometimes made worse by HMRC inspectors on the ground who, do not understand the technology and  apply an unreasonably high threshold which is not consistent with the published DTI definition.  The aim of the guidance is to reward companies for undertaking non routine, technologically challenging work, not just traditional “R&D” activities.”

UK manufacturing is being squeezed by price hikes in oil and raw materials and the down turn in consumer spending has also damaged profits. David Cobb said: “UK manufacturers still do a lot of innovative work but are missing out on a real life line and extra cash injection. For loss making companies the position is even worse as increasing the amount of loss carried forward is unlikely to provide any incentive to increase R&D spend, yet that may be just what the company needs to turn itself around.”

Cobb believes the challenge going forward is to improve the education of on-the-ground revenue inspectors and increase the number of companies submitting claims.  The more exposure Inspectors have to good quality claims, the more their understanding will increase.  Most importantly he believes that many of changes required to improve British competitiveness and boost the take-up of R&D tax relief are cultural and must start within the organisations making the claims.

*DTi 2004 R&D score board

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