Tax supercharged investment strategies for productivity improvement

It may be that despite its best attempts, a business simply cannot fully achieve this, or in any event, wants to explore how it might do more with the same or less labour resource. This might involve some changes in products or services (to make them less labour intensive or of higher value for the same labour inputs) or capital investment in things like Artificial Intelligence or robotics to reduce dependence on labour inputs or reduce production costs generally. Such a project will typically involve some combination of product changes, process improvements or the use of more efficient production methods to maintain or improve profitability and growth, whilst minimising labour inputs energy or other costs.

Where the business is operated through a company, in thinking through your strategy the two principal tax incentives currently provided by the government - Research and Development tax credits (R&D) and the super-deduction regime for plant and machinery – can potentially significantly underwrite your costs and so gear up the Return On Investment (ROI) on any project.

Bringing your project costs within the R&D tax credit scheme will be the most effective way to supercharge your investment strategy and its ROI. R&D tax credits within the SME scheme can provide total corporate tax relief of just under 44p in the £ of qualifying revenue expenditure compared to the tax relief for the normal expenditure of 19p in the £. For loss-making companies, cash-back claims can amount to just over 33p in the £. If you are exploring technical product changes of any sort or systematic technological improvements in process or production methods, then you are extremely likely to be incurring expenditure – most likely payroll costs of those involved in the project - which could qualify for R&D tax credits, since the purpose of the project will be technical innovation of some sort.

Qualifying expenditure will include not only that which, in the end, leads to the technical solution which you adopt as a business, but will also include expenditure on exploring the different approaches which were considered and eliminated before arriving at the solution which worked for you.  There are a number of other conditions to determine whether the relief is available and can be claimed.

Project costs qualifying for the super-deduction regime for capital expenditure on plant and machinery will be the next best.  The super-deduction can provide corporate tax relief of in total just under 25p in the £ of qualifying expenditure at current rates. The super deduction is only available for qualifying expenditure incurred on or before 31 March 2023. If such expenditure is incurred after this date or does not meet the conditions to qualify for the super deduction, it may be possible to obtain 100% allowances through the annual investment allowance or through allowances applicable to capital expenditure for R&D purposes.
Typically of course any systematic changes or improvements in products or in production methods will involve some expenditure qualifying for R&D tax credits and some qualifying for the super-deduction. A typical project, whether in the engineering, apparel, food, data processing or any other sector, might involve four phases:

1. Answering the question ‘What is the product or service enhancement that we can achieve?’;
2. Answering the question ‘How do we adapt our production methods to achieve it?’;
3. Acquiring the equipment to achieve it;
4. Incorporating the new equipment into the production system.

The costs involved in solving the technical problems in [1], [2] and [4] can potentially qualify for R&D tax credits because these parts of the project are focused on technical innovation. The capital expenditure in [3], the actual cost of equipment, may qualify for the super-deduction.

We would be glad to discuss how we can help you develop your project strategy and how the tax reliefs for innovation can improve your ROI.

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