It’s tempting to see tax obligations as a box ticking exercise, or worse, a distraction from the day-to-day of doing business. But this doesn’t do justice to the power of tax. As Dartington Crystal’s story illustrates, using this power wisely can transform your business.
Tax is more than just a sum you pay. It’s also a network of incentives, created by the government to engineer desirable outcomes. The research and development (R&D) tax credit is a powerful example of this, benefitting innovative businesses and spurring a virtuous cycle of investment and re-investment.
What makes the R&D tax credit uniquely powerful is not just its material benefits (although those are substantial: SMEs are able to claim up to 33p for every £1 spent on qualifying R&D activities), but its broad scope, encompassing all UK limited companies that spend money developing new products, processes or services.
How R&D tax credits shape a mindset
For Dartington Crystal, one of the world’s leading producers of glassware, the R&D tax credit was not only a generous source of revenue, it had a halo effect on the business.
Dartington’s skilled workforce has been handcrafting crystal products in Devon for decades. It is the last remaining prominent engineering company to produce glassware by hand in the UK. But tradition is by no means an impediment to innovation, and when Alan Ramsay took over as finance director, he quickly realised the company was doing valuable R&D.
Because there is no governing body for glass-blowing, Dartington Crystal is not able to seek government funding for apprentices. They have to pay the normal market rate for trainees and the R&D tax credit allows them to invest in the future of their industry.Alan Ramsay, Finance director, Dartington Crystal
What is commonly called ‘glass’ is a catch-all term for a range of applications. The material can be moulded into an ornate whisky tumbler – or it can be strengthened to stop a bullet. This variance is related to how the glass is produced: additives, temperature variance, cooling times, production technique and the specialist equipment to create the desired effect.
Alongside its standardised stock, Dartington Crystal frequently accepts bespoke commissions like prestigious trophy replicas or high-end whisky bottles which may require intricate finishing details. It might be new colour palettes or delicate structures, experimentation with moulds or compound materials.
In cases like these, applicable consumable costs (such as power, some materials and water), and staffing costs could be included in the claim for R&D tax credits. Again, the monetary benefits of claiming the incentive were substantial – but the tax credit’s deeper benefit was its impact on the company’s culture.
“Knowing that R&D tax credits are there focuses the mind on innovation,” Alan says. “In my role as FD, I always question where the innovation is so I can allocate extra staff to true R&D projects. I’d suggest that companies who qualify look beyond the obvious cash benefit.
Extract the full value of craftsmanship
In Dartington’s case, the company lost none of its craftsmanship or tradition; it merely used R&D tax credits to extract the full value of their labour.
Innovation and R&D aren’t the sole reserves of Silicon Valley or Shoreditch. The definitions of what R&D is and isn’t – for the purposes of the tax credit – are wide, and the UK’s many engineering and manufacturing firms stand to benefit.
The credit Dartington Crystal received allowed it to take on an additional product designer. “This may not sound significant, but it represents a doubling in the workforce,” Alan says. Dartington Crystal has also been able to recruit glass-blowing trainees.
Because there is no governing body for glass-blowing Dartington Crystal is not able to seek government funding for apprentices. They have to pay the normal market rate for trainees and the R&D tax credit allows them to invest in the future of their industry.
Read more about R&D in engineering.
It may surprise some readers to see Dartington Crystal being referred to as engineering. But speaking broadly, and paraphrasing the Royal Academy of Engineering, engineers make stuff, make it work and improve on existing creations.
For the purposes of R&D tax credits, this broad definition holds and ‘engineering’ can be applied to a huge range of sectors, from developing marine tech like underwater remotely operated vehicles to advanced chemical research and manufacturing or, indeed, making glassware like Dartington.
Engineering is uniquely well placed to benefit from the incentive because, for lack of a better phrase, it’s difficult. A good rule of thumb for identifying qualifying R&D expenditure is that you will probably be attempting to solve a problem where no solution is evident.
In engineering, this happens – a lot. In our experience, R&D can occur during all stages of an engineering project. In the early stages of a project, once you have defined your technical goals, this could include identifying the specific technical risks and uncertainties and conducting feasibility studies.
Then during development, R&D may be present in the physical and digital design work, the build and ongoing analysis. Often, engineering projects are on a large scale and much effort goes into computer modelling of possible designs and solutions. In some disciplines, this stage also involves producing and testing prototypes.
All this design and test work helps to manage the risk and is particularly crucial in R&D projects, where there is uncertainty over the outcome. Once the output is complete, further technical testing and carrying out of remedial work or adjustments may still count as R&D.
Even ongoing maintenance could involve research and development if you are uncovering technical problems and there is technical uncertainty in seeking to resolve them.
As we see in the case of Dartington Crystal, the incentive has a way of refocusing and reorienting businesses which harness its full power. Suddenly, there’s potential for everywhere and innovation loses some of its risks. That’s when a culture of R&D begins to blossom, and the benefits spill beyond even the business itself.
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