Claiming R&D for Hardware and Manufacturing
The manufacturing industry is a very diverse sector that can include commodity products such as some foods and beverages to high value-added products such as automotive and aerospace components. Creating machine tools, medical devices, and electronics are some of the areas of this sector where a significant amount of R&D can be found.
R&D is particularly essential for manufacturing companies as the global and local market almost always demands the development and manufacturing of new, innovative, and improved products. If your manufacturing company is going out of its way financially and technically to solve technical problems or develop new products or services that require a significant amount of experiments before they can be viable, you may be undertaking some activities that are considered eligible R&D under the programme.
Eligibility is based on these activities instead of the project as a whole. It should also be noted that expenditures such as interest expenditure (within the meaning of interest in the withholding tax rules), non-risk expenditure, core technology expenditure, and expenditure from the cost of a depreciating asset are ineligible under the R&D tax incentive. Nonetheless, the decline in asset value notional deductions may apply.
R&D activities must either be a core or a supporting activity based on its definition in the legislation.
Core activities follow the systematic progression of work and are hypothesis-driven. They are experimental activities to which the outcome cannot be determined in advance by experts in the field. Core activities must also be based on the principles of established science and should be undertaken primarily to generate new knowledge. On the other hand, supporting activities, are activities that are not part of the experimental activities, but are undertaken for the dominant purpose of supporting the core activity.
Below are some examples of core activities in the manufacturing sector:
1. Experimenting with the viability of a new material
2. Designing or developing new equipment
3. Developing new or unique computer control programs
4. Innovating programmable logic controllers
5. Creating new approaches in prototyping and three-dimensional solid modelling
6. Creating new approaches to integrating new materials
7. Inventing novel methods to designing, construct, and test product prototypes
Examples of supporting activities are:
1. Conducting literature review before conducting experiments to find out whether the knowledge to solve the technical problem exists
2. Testing the product, process, or prototypes
3. Planning and managing tasks involved in the conduct of the core activity
4. Assembling and training prototypes
Maintaining contemporaneous documentation that demonstrates eligibility of the declared core and supporting activities under the R&D tax incentive programme is mandatory. To establish eligibility, companies should document and record the development of each core and supporting activity. By documenting eligible R&D activities as they are conducted improves the possibility to capture associated costs in real-time. Moreover, it is also important in a manufacturing environment to know the difference between the R&D process and “business as usual” operations as the activities done for the latter are not eligible under the programme.
Self-assessing the eligibility of manufacturing and hardware -related development activities may seem complicated. But with our years of experience delivering R&D Tax incentive to many tech companies – many of them specialise in hardware, we have developed a streamlined methodology to make R&D tax incentive claim simpler. We are confident that we can help you determine your eligible projects and activities, as well as the maximum amount of eligible expenditure that you can claim for your projects.