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Manufacturing

A culture of R&D: How we got Exception’s R&D machinery churning

Challenge

A heritage-turned-modern engineering firm doing extensive research and development (R&D) knew about R&D tax credits but was not accessing everything they deserve. Exception EMS’s FD wanted to change this without risking the company’s healthy relationship with HMRC.

Impact

Although Exception was dubious about bringing in a new specialist adviser after a bad experience, a conversation with ForrestBrown changed the FD’s mindset. It was clear that the all-important relationship with HMRC would be protected.

Value

Working together, we produced a substantial R&D tax credit claim that was defensible and robust. Combined with Exception’s business planning, the R&D tax credit windfall provided the company with a double benefit.

ForrestBrown gave us a lot of confidence in what they were doing. Some of their team have actually worked in the R&D unit at HMRC, so know what it's like from the other side. Noel Murphy Finance director, Exception EMS
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In 1948, with the fog of World War II barely dissipated, a group of ex-RAF engineers clubbed together to start a business. The men planned to use their skills to supply the UK’s then bustling automotive industry.

As that industry waned, Exception EMS – as the company was named – diversified into defence, providing emergency repairs for equipment during the Falklands War, amongst other things. Following a management buy-out in 1986, Exception re-focused its efforts on the assembly and testing of complex printed circuit board assemblies.

Alongside the defence industry, the company now works with the aerospace and oil and gas sectors. Exception designs prototypes, printed circuit boards and assemblies for mission-critical applications in these demanding industries. By their very nature, Exception’s products have to withstand strenuous situations.

Today, Exception has a multi-million-pound turnover and an international client base. Critical to its success is a strong culture of research and development (R&D) to stay ahead of competitors and meet evolving client demand.

The company was aware of the government’s R&D tax incentives. Indeed, Exception had made use of R&D tax credits before, but it was underwhelmed by the company it initially used to facilitate the claim.

We preserved losses in the business that we had utilised in prior years and also got money back from the revenue, so it was a win-win situation. So we enjoyed a two-fold benefit.

Exception and ForrestBrown

It’s at this point where Exception and ForrestBrown’s relationship began. Noel Murphy, Exception’s finance director, explains he was reluctant to get another company involved in the R&D tax credit claim process — but Noel was swayed after meeting with ForrestBrown’s team.

“ForrestBrown gave us a lot of confidence in what they were doing,” he says. “We met staff who had actually worked in the R&D unit at HMRC, so knew what it was like from the other side.”

The government definition of R&D for tax purposes is deliberately broad. R&D takes place, according to the government, “when a project seeks to achieve an advance in science or technology”.

This broad definition is great because it encompasses all sorts of businesses — but, at the same time, many companies might think R&D tax credits aren’t for them. Or, as in the case of Exception, err on the side of under claiming rather than invoking HMRC’s attention. As a result, businesses are losing out on a valuable source of cash or tax relief.

Maximising an R&D tax credit claim

A big part of ForrestBrown’s expertise is safely maximising R&D tax credits. A diverse team of tax advisers, sector specialists and former HMRC inspectors carefully guide the claim; maximising it while keeping it robust and defensible.

Taking the time to understand what a client does is a critical step in this partnership. Not just their potential innovation but the full spectrum of a company’s work.

In Exception’s case, ForrestBrown took a detailed tour of their factory. Only then did a narrower focus on specific projects and costs follow to identify valid areas of R&D activity.

Exception’s IoT enabled R&D

One such project involved refreshing the design of a product that had already been in production for 15 years. Although the initial brief was to enhance cost-effectiveness, Exception was also keen to explore whether the product could be networked to join the Internet of Things (IoT).

A piece of machinery that’s IoT-enabled can transmit key diagnostic information, for example, allowing Exception to proactively track its performance.

This project was an outstanding success. Following in-depth research, the production of a prototype and thorough testing, Exception has now helped its client develop a product with significantly more features than others on the market – and far higher levels of reliability.

On top of the project’s commercial success, Exception’s work with ForrestBrown maximised its R&D tax credit claim. The scale of the tax relief was a pleasant surprise and, Noel explains, it boosted the benefits gained by the company’s own careful business planning.

“We preserved losses in the business that we had utilised in prior years and also got money back from the revenue, so it was a win-win situation,” he says. “So we enjoyed a two-fold benefit.”

I would have no hesitation in recommending ForrestBrown. The more we work with them, the easier the process gets. Noel Murphy Finance director, Exception EMS

A culture of R&D

The work with Exception went beyond tax credits, however.  ForrestBrown helped them implement robust processes for recording their future R&D expenditure, too.

A factory management system has been introduced to track the time employees spend on individual projects. And for more senior staff, time spent on R&D projects will be logged through a regular agenda item at their monthly meetings.

These processes transform R&D tax credits from a one-off bonus into a dynamic, cyclical benefit. Exception is now geared to continually harness the full value of its innovation. “I would have no hesitation in recommending ForrestBrown,” Noel says. “The more we work with them, the easier the process gets.”

ForrestBrown thinks

R&D tax credits are now almost two decades old. In that time, the incentive has gone from strength-to-strength. HMRC has reviewed over 500,000 R&D tax credit claims.

Despite this success, there remains an education gap. Many, many more businesses can benefit from the incentive and even those who do use it often under-claim. There’s a strange mix at work between the government’s broad definition of R&D and many people’s very narrow conception of it.

The official definition of R&D for tax purposes is broad precisely because the government wants businesses to make use of it. What’s needed is for companies to change their mindset.

If you embark on a project that you know is achievable but you’re not sure how you’ll succeed, it’s worth asking “Are we doing R&D?”. Think about projects you’ve completed or attempted — did any of them overrun on cost or time scales?

Faced with a broad definition of R&D for tax purposes, businesses should, in turn, broaden their appreciation of R&D. And by partnering with us, you can ensure a claim that is safe, comprehensive and valuable.

If you’re an engineering or manufacturing firm and want to find out more about working with ForrestBrown and the value we bring, contact us today.