Manufacturing costs that qualify for Research and Development (R&D) tax credits

New product development (NPD) and new product introduction (NPI) teams

Many manufacturers claim the core R&D activities for their NPD teams, and the claimable costs tend to centre around staff or contractors used to support new product developments. However, don’t overlook claimable teams that are directly and indirectly supporting. Teams such as NPI who take the design into production and work alongside manufacturing are often overlooked, for example.

Staffing costs are only part of the claim that a manufacturing business can make. All manufacturing businesses will run production trials or create prototype units for testing. Including these costs can increase the scheme’ to your business, but care is needed to avoid tripping over the rules around sold trial items.

Prototype and trial costs

Manufacturers will create prototypes throughout a development programme. Initial feasibility prototyping involves a proof of concept, using off-the-shelf hardware and in-house engineered components. Once the feasibility is shown, businesses will move on to a fully functional product constructed of pre-production components to represent the final product design. For that reason, new product designs generally undergo several prototype iterations before they’re ready for the production line. Whereas it’s common to think in terms of a single prototype, testing a batch or continuous flow process can result in creating multiple prototypes in a single design iteration. This design process can usually see as many as three to five different prototype phases, with many test units put through their paces as the product matures and the design is finalised. The labour and material cost of producing these prototypes can be considered for inclusion in your R&D.

However, as the product design matures or the cost of a prototype becomes prohibitive, companies may look to sell the initial item to a customer. At this point, the material costs might become ineligible. The rules around claiming sold prototype items are complex. Many businesses ignore this aspect of their claim, which can cause issues when the numbers are checked during a due diligence exercise or an HMRC claim check. We recommend that you obtain advice before preparing a claim to understand what can and can’t be claimed to avoid costly mistakes.

Outsourced production

Although the final product produced by your development partner may not be claimable, the development and NPI teams will likely work closely with any outsourced manufacturing provider to create the production process to transfer manufacturing into their equipment. Again, the sold prototype rules are likely to apply to these costs, but there is an extra complication after 1 April 2024 when overseas outsourced costs will not be claimable in the UK. It might be possible to claim for materials at this point, but subcontracted design costs will need to be excluded. 

This will complicate claims and make the need for accurate record-keeping even more critical. We are working closely with a number of clients to plan for the proposed R&D scheme changes and can help you understand the impact on your claims going forward.

Post-launch R&D

Many businesses overlook the work undertaken after a product is launched for R&D tax credit purposes. But process improvement activities to increase yield, reduce failures or simply to reduce costs should be considered when making a claim. This work will likely involve a significant input of time and effort from the production teams. This is where the record keeping in relation to staff effort and trial costs can become tricky to identify. We can help you improve your systems to track claimable costs better and put in place claim processes that can be easily rolled forward.

How we can help

R&D tax credits can provide a good source of financial support to innovative businesses, like yours, in the manufacturing sector. However, understanding the rules around qualifying costs to be able to optimise your R&D tax credit claim can be difficult.

At Buzzacott, our R&D specialists will help you to understand your eligible activities, without holding you up, so you know how to build a robust R&D claim. We know R&D tax credits are important to you and you can’t afford delays in the repayment due to enquiries from HMRC. That’s why you need to engage an adviser you can trust. We're here to fully support your business with preparing and claiming R&D tax credits.

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