How R&D tax legislation reform will affect the UK manufacturing sector

As a business innovating in the manufacturing space, you will be affected by upcoming changes to research and development (R&D) tax legislation. In July 2022, the government published draft legislation setting out important changes to R&D tax incentives. Some are due to be introduced for accounting periods beginning on or after 1 April 2023 and some will be introduced on a pro-rata basis. The draft legislation includes changes to overseas R&D tax relief, as well as the net tax benefit of both the R&D expenditure credit scheme (RDEC) and the SME R&D tax relief scheme.

Manufacturing R&D

This useful incentive allows you to recoup some of your investment in developing new and improved technologies to overcome industry challenges, whether this is to improve production rates, use AI in manufacturing innovation or develop specialised tools.

Qualifying R&D can be found across a diverse spectrum of manufacturing businesses and can include:

Optimising manufacturing processes by developing AI-based knowledge/solutions.
Developing tooling that can enhance manufacturing efficiency or reduce serviceability and cost of tooling.
Developing methods or techniques that improve production processes, such as modularised manufacturing lines.

What are the changes to overseas R&D?

Under the new rules, a UK company carrying out R&D outside the UK will no longer benefit from R&D tax relief (under either scheme) unless it is classed as ‘qualifying overseas expenditure’. For that to apply, it must meet all three of the following criteria:

Conditions necessary for the R&D are not present in the UK.
Conditions are present in the location where R&D is undertaken.
It would be wholly unreasonable to replicate the conditions in the UK.

Examples include:

where it would be wholly unreasonable to undertake the R&D, such as a commercial testing facility with specialist equipment being non-existent in the UK and that could not be reasonably replicated.
where using a facility in the UK would take too long for the required timescale.

What are the changes to RDEC and SME relief?

For expenditure on or after 1 April 2023, the RDEC rate increases from 13% to 20% (boosts EBITDA). The SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%.

Expert R&D help

Your R&D strategy needs to keep up with today’s fast-moving world. Our specialist team of scientists, engineers and tax advisers not only identify activities that qualify as R&D, but also consider broader tax implications. Additionally, the team knows how best to present your figures to HMRC to maximise your R&D tax relief, as well as guiding you through legislation changes.