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R&D in engineering

Phil Smith CTA
Technical Lead
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UK engineering has a rich heritage and remains an industry full of exciting innovation. Engineering companies are continually investing in research and development (R&D) to solve complex problems as they create new things or improve existing ones.

The UK leads the way in certain fields such as motorsport engineering, aerospace engineering and pharmaceutical engineering.

Back in 2018, engineering found itself in the spotlight with the government making it the UK’s Year of Engineering. This then evolved into ‘Engineering: Take A Closer Look’ that continues the celebration of the amazing role that engineering plays in our world: spaceships, ice skates, bubbles in chocolate bars and tools for fighting cancer. This sums up the diversity of engineering beautifully.

These campaigns are designed to ensure that our engineering future is bright. There’s a valid concern that not enough young people (particularly girls) are taking an interest in the STEM subjects (science, technology, engineering and mathematics), which lead to a career in engineering.

About 1.7 million people are employed within UK engineering, and it’s said that 265,000 people need to be entering the UK’s engineering workforce annually to meet demand.

At ForrestBrown, we know that many of our engineering clients use R&D tax credits to fund new staff. We are aware of the positive impact that this can have on their growth and scope of future R&D projects – as well as the wider economy. This means that we are acutely aware of the need for supporting STEM talent and STEM education for all.

UK engineering

With so many people employed in the UK engineering sector, it’s no surprise that it makes a major contribution to the economy – quantified as nearly half a trillion pounds annually. But what exactly is the engineering sector?

Speaking broadly, and paraphrasing the Royal Academy of Engineering, engineers make stuff, make it work and improve on existing creations. Taking this principle, it’s clear that you can apply it to a huge range of engineering sectors, from developing marine tech like underwater remotely operated vehicles to advanced chemical research and manufacturing.

Engineering disciplines tend to break down by sector, so a fuller list of engineering sectors in the UK may look like this:

  • Aerospace engineering
  • Architectural engineering
  • Automotive engineering
  • Biochemical engineering
  • Construction engineering
  • Infrastructure engineering
  • Chemical engineering
  • Civil engineering
  • Military engineering
  • Electrical engineering
  • Green engineering
  • Geotechnical engineering
  • Engineering for hydrology
  • Engineering for manufacturing
  • Marine technology engineering
  • Motorsport engineering
  • Engineering relating to materials
  • Mechanical engineering
  • Petrochemical engineering
  • Pharmaceutical engineering
  • Plant engineering
  • Power engineering
  • Process engineering
  • Railway engineering
  • Software engineering
  • Structural engineering
  • Surveying engineering
  • Systems engineering
  • Telecoms and network engineering
  • Transportation engineering

Research and development in engineering sectors

R&D is crucial to all engineering sectors. So often, engineering is about solving technical problems and developing next generation products and infrastructure. Or working out ways to keep existing assets working.

What does R&D mean in engineering?

Drilling down a bit deeper, we can see that R&D could 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, so much effort goes into computer modelling of possible designs and solutions. In some disciplines, this stage also involves producing and testing prototypes. All of 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.

Ongoing maintenance could involve research and development if you are uncovering technical problems and there is technical uncertainty in seeking to resolve them.

Let’s see how this could apply to a couple of engineering sectors in the real world.

Innovation and R&D in civil engineering

Civil engineering includes disciplines such as transportation engineering, geotechnical engineering, environmental engineering and structural engineering. Projects in these branches are full of research and development. Innovation in civil engineering concerns the design, construction and maintenance of the infrastructure around us, like roads, railways, bridges and buildings.

One of the key problems that has to be addressed with construction in built-up areas, is how a new building is constructed safely and in a way that is sensitive to its surroundings.

Sometimes this will impose limitations on a project that will influence the materials used, structural engineering decisions, and cost-management. Maybe there will be an established, common-sense solution, but for unique projects clever workarounds may have to be developed which could involve engineering R&D.

One high-profile project that is having to work hard to overcome such difficulties is the Paddington Cube project in London. Originally, it was the Paddington Pole and was going to be a 72-storey skyscraper. However, opposition resulted in a change to plans. It will be a 14-storey glass cube that will rest on a 12-metre high platform to accommodate existing infrastructure. Stunning concept pictures show that it gives the impression that it is floating.

Innovation and R&D in mechanical engineering

Mechanical engineering relates to moving things or parts. Robotics is just one fascinating area.

A team at MIT in the USA are attempting to develop robots which can navigate their environment without using vision sensors. This is known as blind locomotion.

Their 41 kilo Cheetah 3 robot is designed to feel its steps as it goes and mechanically respond instantly. For robots this could be a far more reliable way to get around. Once the robot has the necessary sensors and processing power to understand its environment, the mechanical engineering challenge is to build a body and limbs that can respond and move appropriately.

If this video is anything to go by they are well on the way to achieving that. The robot can trot, bound, gallop, pronk, spin and recover if it stumbles. It shows mechanical and electrical engineering R&D at the cutting edge.

R&D tax credits for engineering firms

Another way in which the government is supporting engineering firms and promoting innovation in the sector is with R&D tax credits. A valuable government tax incentive, R&D tax credits are intended to encourage innovation and grow the economy, which in turn helps the UK on a world stage.

R&D tax credits for engineering firms

Photo by Ricardo Gomez Angel via Unsplash

According to the latest statistics from HMRC, R&D tax credits have contributed billions of pounds to the UK economy.

R&D tax credits are available to all companies regardless of sector or size. There are two incentives.

The SME scheme is for companies with fewer than 500 employees, and not more than €100 million turnover or €86 million of gross assets.

RDEC is for companies that do not meet the criteria for the SME scheme, often larger companies. It can also be used by companies that are excluded from the SME scheme for a few other reasons, including being in receipt of certain types of grant.

With so much scope for innovation, it’s surprising that more engineering firms do not claim R&D tax relief. According to the latest government statistics on R&D tax credits, just 7% (5,585) of SME claims came from the construction sector which is dominated by engineering firms.

Using our expertise, ForrestBrown is regularly able to identify R&D activities within the projects that engineering firms are carrying out. It often surprises them that what they would consider day-to day activity actually qualifies for this powerful tax incentive. In many cases, previous advisers who had worked with them had not made the connection either. So it’s often the case that we help them uplift previous claims significantly too.

How engineering companies can benefit from R&D tax credits

R&D tax credits should be a vital planning consideration for any engineering business as well as those in their supply chains.

The main reason is their financial benefit. R&D tax credits from the SME scheme are worth up to 27p for every pound of qualifying expenditure post 1 April 2023. And in RDEC it is 15p for every pound, although the claim sizes tend to be much larger due to the scale of operations.

You don’t have to give anything up to get this cash, other than some time towards the claim preparation. It can have a transformative effect on your projects or whole business. For instance, we know that half of businesses who claim R&D tax credits use the money to hire new talent.

Aside from this cash boost, claiming R&D tax credits can help you develop an R&D culture in your business. By introducing the R&D angle into your decision-making processes, it can enable you to be bolder, take more calculated risks, and create a more stimulating environment for your staff.

Identifying qualifying costs for engineering R&D tax credit claims

Whether you’re new to R&D tax credits or have claimed them before, it’s useful to understand what kind of engineering projects qualify for R&D tax credits.

Select the engineering sector most relevant to you, and bear in mind that these are just a few examples of qualifying engineering projects. R&D could be in any project where you are attempting to resolve scientific or technical uncertainty and seeking an advance in your field.

What type of engineering projects qualify for R&D tax credits?

The government’s definition of R&D is purposefully broad which allows for so much to be included. Interestingly, it is far more broad than what an engineer may consider to be R&D, which inadvertently becomes a barrier to claiming (or fully claiming) valuable R&D tax credits.

To qualify for R&D tax credits, you need to be attempting to resolve scientific or technological uncertainties. This means you are not sure your project is scientifically or technologically possible, or the knowledge of how to achieve it is not yet widely available in your field. Your project does not need to be successful for it to qualify for R&D tax credits.

Examples of qualifying R&D expenditure in engineering

There are set costs of a project that can be included in a claim. Determining the eligibility of each of your project costs is the job of a skilled tax adviser. Qualifying expenditure includes:

  • The salaries of engineers working directly on the R&D. You can also include employer national insurance contributions and pension costs.
  • A proportion of other staff’s (who support R&D engineers) employment costs.
  • Contractors carrying out their services via agencies.
  • Money spent on development or testing work you have subcontracted to other firms.
  • The cost of materials transformed during the R&D process. This includes consumables like light, heat and power, as well as materials relating to the project.
  • A proportion of relevant software costs like your CAD and 3D modelling software used by research and development engineers.

Subcontractors and engineering R&D tax credit claims

We mentioned subcontractor costs, and for engineering firms these can form a significant part of a claim. Often you’ll need to bring specialist skillsets into a project to complete it. Are your subcontractors developing a new alloy for you? Experimenting with bespoke valves? Conducting complicated hydrology modelling? It may be a key part of the R&D and something you may be able to claim.

Want to make a new R&D tax credit claim, or review a recent claim

At ForrestBrown we specialise in R&D tax relief. This means that we’re often able to uncover R&D expenditure in engineering projects that other advisers miss. It also means that we know what not to include in a claim, minimising your risk of a challenge from HMRC.

Are you an accountant advising engineering firms?

Find out how we can work with you to maximise the benefit for your client.

Our team is made up of chartered tax advisers – the gold standard in tax. They are complemented by knowledgeable sector specialists, accountants and former-HMRC tax inspectors.

As well as preparing claims, we also help you to develop an R&D culture in your business. This helps inform your decision-making processes, improves your record-keeping, enhances the working environment for talented staff and gives you an edge through your innovation.