Research & Development (R&D) tax credits are one of the biggest funding mechanisms provided by Government to encourage innovation in UK businesses.  However, the definition of what constitutes R&D activity is much wider than is often thought and tax relief is available to many businesses outside the traditional research-based industries such as pharmaceuticals. Steven Blacker, director in R&D Tax Services at Deloitte in Leeds, explains how manufacturers can make the most of the opportunity R&D tax credits present.

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Over the last few years, maximising cashflow has increasingly been at the heart of many companies’ agendas. Research & Development (R&D) tax credits are one of the biggest funding mechanisms provided by Government to encourage innovation in UK businesses. Since their introduction, the schemes have supported nearly £52 billion of R&D activity by UK companies. There was further clear support for the R&D scheme from the Government in the Budget with SME tax deductions for R&D spend increasing from 175 per cent to 200 per cent in April 2011 and then to 225 per cent in April 2012, subject to State Aid approval.

What constitutes R&D activity is not always straightforward. The definition is however much wider than is often thought, and the relief is available to many businesses outside the traditional research industries such as pharmaceuticals.

Historically, one of the more difficult areas to determine is where R&D activity ends and where production, which does not qualify, begins. HMRC have recently reviewed their position on this, leading in turn to opportunities for organisations performing R&D in the manufacturing environment to potentially extend the scope of their claim. While there is no definition of production for these purposes, based on recent experiences, a number of principles are emerging.

Since 2000, companies have been able to claim valuable enhanced tax deductions for, amongst other costs, staff and consumable costs incurred on R&D projects. Broadly, for tax purposes, R&D takes place where new, or significantly improved, products or processes are being developed and it continues up to the point where the technological uncertainty is resolved. For many manufacturing companies, the transfer from the lab or bench to full scale production, or the development of full scale working prototypes can present a major technological challenge. Accordingly, a number of manufacturers have made R&D tax claims for both the materials and staff costs they have committed to these activities.

Historically HMRC had accepted these claims where the end product generated in the development trials is not sold, but have refused claims where the product is sold, even if at a loss, on the basis that this represents “production” and is therefore specifically excluded from the scope of R&D tax relief. Recognising that the position was open to interpretation, HMRC issued further guidance at the end of 2009 which prevented a claim being made if there was any intention to sell the end product.  This blocked claims even where the trials ended in failure and the product generated was scrapped.

The Government are currently in consultation over this area. However, in the meantime, HMRC have confirmed that they will continue to engage in constructive dialogue with companies to help resolve any issues. More recently, we have seen HMRC agreeing to review the fact pattern of claims where full scale trials are performed as an integral element of an eligible R&D project, even if the end product is sold. This approach is at present being tested by HMRC to confirm its applicability from a practical perspective before issuing more formal guidance, but early indications seem to be very positive, and it would seem that HMRC are starting some work on the drafting of new guidance on this matter.

Some of the common principles for agreeing future claims that we have seen emerging in the UK market include:

• The technological uncertainties that the R&D project was seeking to resolve need to be clearly identified to allow the contribution of the trial to be understood
• Technical staff working on R&D projects need to confirm how each element or phase of the trial contributes to the R&D process. In many cases, trial activities continue long after the R&D for tax purposes is complete
• The section of the plant or process involved in the trial must be carefully defined, so that the costs associated with the R&D element can be identified. For many large scale processing facilities this is not a trivial exercise

It’s your relief, so take it!  

Remember:

• R&D is not only performed by R&D departments
• R&D is not just about rocket science
• Claims are possible even if R&D costs are recharged
• Engineering and software design can be R&D
• Large maintenance and upgrade works can be R&D
• Eligibility is not contingent upon the success of the research

You do not need to retain intellectual property to make a

Despite another oil crisis looming, a recent survey carried out by Deloitte show that mass adoption of electric vehicles (EVs) is still a distance away.  According to the survey, only 16 per cent of European consumers identify themselves as potential first movers, while 53 per cent say they might be willing to consider and 31 per cent say they are not likely to consider purchasing or leasing an EV.

Mass adoption of electric vehicles will be significantly influenced by a number of factors, including rising fuel prices, advancements in internal combustion engine vehicles, and the availability of government incentives. The survey shows that there is a tipping point in terms of fuel prices influencing consumer adoption of EVs. In addition, automakers will be challenged to price electric vehicles to meet the expectations of consumers while maximizing their margins.

For mass adoption, manufacturers will need to meet the challenge of pricing electric vehicles in line with consumer expectations, while still maximising their margins.  Consumers are not likely to want to pay a high price premium for EVs.  This means that incentives such as tax reductions and exemptions will be very important to the purchase decision.  Just like the Government supported the highly successful car scrappage scheme, they should now be turning their attention to electric vehicles.

However, a bright note for the UK is that it appears from our research that UK consumers are more willing to pay a premium for electric vehicles than their counterparts in other European countries. Manufacturers believe that it should be possible to achieve a range of nearly 300 miles, coupled with quick charging times of less than 10 minutes in the next three to five years time. Once this is achieved, we can expect to see a rapid take up of electric vehicles. It is possible that, as with the rapid adoption of diesel engine vehicles back in the early to mid nineties, we could expect to see up to 20% of all light vehicles  being electric within the next decade.

To review the report – click here – Gaining Traction

Much has been made of UK manufacturing’s key role in the revival of the economy with local, regional and national sourcing an important part of the mix.

In this light, a golden opportunity to fly the flag for the best of British appears to have been passed up by the Royal couple, in by-passing the craftsmanship of Stoke-on-Trent and ordering wedding tableware from a Chinese company with only 23 years history.

The grub’s coming from the Groom’s father’s estate, but will be served on china from China. We all know of the tiger economy in the Far East and have observed recent courting of that country’s leaders, but surely a little home-based pride wouldn’t have gone amiss.

In similar vein Lord Coe urged regional companies to pitch for London 2012 business but Leeds, with a proud clothes manufacturing heritage, missed out on the supply of over 5,000 uniforms for athletes and officials. OK – the deal was landed by High Street retailer Next, but will the gear be manufactured in the UK or Next-approved suppliers in Sri Lanka?

Jeff Gold, Professor of Organisation Learning, Leeds Metropolitan University and Fellow of the Northern Leadership Academy

Published by guest blogger Jeff Gold, Professor of Organisation Learning, Leeds Metropolitan University and Fellow of the Northern Leadership Academy

With the impending closure of the Regional Development Agencies and uncertainty about the future of traditional business support agencies such as Business Link, it’s clearly a time for new ideas and the use of evidence to identify and put into practice what works.

The recent Department of BIS document, Understanding Local Growth White Paper, Local Growth, recognise the failure of business support and the need to focus on economic growth and concentrate support on employers making high value adding products and services, requiring high skills.

So, once again, policy makers set out their hopes but it is clear that there is little prospect of a radical change in the way we provide an infrastructure to stimulate demand for business development and skills. SMEs in manufacturing and high value process industries, in particular, remain ‘hard to reach’. As a result, very often their potential for growth is unrealised. We also know that regeneration of local economies has to be SME-led.

So, as we move towards a new approach to business support, it is quite possible that the lessons of the past will not be learnt. As part of out evidence to consider what works in SME leadership development, we have highlighted the importance of engagement with managers as a key process. Engaging with SME leaders to provide development, especially those who have previously failed to respond any initiatives, is not an easy process and not all managers need external support.

However, we also know that many managers can become stuck or even lost, failing to move beyond purely operational activities bound by short-term measures – this is the survival position. We have examined engagement in the UK and elsewhere, especially Australia which has been remarkably successful in enabling SMEs to grow and use skills, particularly apprentices.

Engagement is best undertaken by organisations that work out a business case to ensure commercial viability and are incentivised to do so. It is definitely not(?) a ‘tick-box’ exercise based on short-term targets. Engagement begins with an attempt to attract managers into a conversation and is an unpredictable process which relies on the extent to which the engager can become attuned to the interests of managers.

Much of the work to engage requires conversations with others who stand/sit between the target managers and the engager, such as friends, other managers, receptionists, PAs and so on. It  is not lack of awareness which prevents access to business support but perceptions of the time involved and the amount of paperwork to complete, so there needs to be reassurance on the possibility ‘of wasting the manager’s time’.

Engagement requires persistent efforts, sometimes indirectly, to get in front of  managers and then considerable skills of conversation, drawing on  lots of  stories, jokes, chit-chat and making do. If this can be achieved, it opens the door to possibilities of business support based on current interests, from which strategies for growth and innovation can be developed.

Finally………..

As I said, they have been doing this in Australia for many years and it works…..with very high levels of engagement but also high levels of participation of young people in post-compulsory education and training. Go to http://readingroom.lsc.gov.uk/lsc/National/world-class_comparisons-final_report-Sept2008.pdf to see for yourself. 

September’s manufacturing purchasing managers index has slipped slightly from last month, falling to 53.4 from 54.3.  However, it is important to recognise that manufacturers are still reporting rising activity, so it is not entirely negative news.

While the PMI figures suggest that the industry has suffered from a three month period of slower growth following earlier re-stocking effects, the most recent CBI industrial trends figures forecast that production will grow over the coming quarter, which is hopefully an indication that underlying demand is on the rise.

In a further sign of confidence, M&A activity in the sector has picked up over the past few months signalling that businesses are looking to invest and grow. Additionally, insolvencies in the sector have stalled, with administration figures for the first six months of 2010 down 46 per cent compared with the same period last year.

While the industry is not out of the woods yet with lingering fears of a double dip recession, UK manufacturing is in a much better position than 12 months ago and with any luck the returning confidence will lead to a much needed increase in underlying demand.

Our global manufacturing competitiveness index reveals that the UK, US, Japan and Western European countries are expected to become less competitive over the next five years, as China, India and Korea maintain their leading positions. The UK is currently ranked 17 on Deloitte’s global competitiveness index and is expected to drop three positions to 20 in the next five years.

The report, compiled with the US Council on Competitiveness, ranks the countries considered the most competitive now and predicts their relative competitiveness in five years. It also lists the key drivers of competition in the global manufacturing industry, identifying talent led innovation as the highest ranking driver.

Asian giants China, India and the Republic of Korea lead the current competitiveness index and are expected to retain their top three rankings over the next five years. These countries have been emerging as global leaders in manufacturing for a number of years now, and this survey highlights the increasing dominance that the Chinese and Indian economies will continue to have over the remainder of this decade.

In contrast, the dominant manufacturing superpowers of the late 20th century are expected to become less competitive. Other Western European nations will be similarly challenged especially the Czech Republic, the Netherlands, Switzerland, Ireland, Italy and Belgium.

It is disappointing to see that the UK is ranked outside the top 10, positioned at number 17 in an index of 26. Further, it is predicted that the UK will drop three places over the next five years. The fact that both the US and Germany are ranked in the top 10 shows that the drivers of competitiveness are not just cost-based. Both the US and Germany have high wage costs and rigorous safety and environmental standards in place, similar to the UK, yet for example, the US is given a competitiveness score of 5.84, more than double the UK’s of 2.82.

It is vital that the new UK government works jointly with manufacturers to ensure they can improve their global competitiveness. The UK manufacturing sector is predominantly focused on emerging new technologies and high tech industry, we must continue to invest in and develop these areas. Given the significant proportion of UK GDP earned through our manufacturing base, and the number of people employed in this sector, any further slippage in our global competitiveness will have a real impact on the broader UK economy.

European policy strengths and weaknesses

Interestingly, when asked to identify national policies that they perceived as contributing to their country’s competitive business advantage or disadvantage, senior manufacturing executives said that Europe benefited from policies that strongly support infrastructure development (46.1%) as well as science and technology and innovation (43.4%), and intellectual property protection (42.1%). On the downside, European executives felt disadvantaged by labour laws and regulations (42.1%), as well as environment policies (36.8%) and energy policies (31.6%).

Drivers of global manufacturing competitiveness

When asked to rank the drivers of global competiveness, respondents listed access to talented workers capable of supporting innovation as the most important driver globally, with a score of 9.2 well ahead of the traditional factors typically associated with competitive manufacturing, such as labour, materials and energy.
Within the UK, we have seen a shift over the past decade away from our more traditional manufacturing base into high tech and cutting edge technology sectors. Our manufacturing sector is differentiated by our innovation – we must ensure that the industry and our government invest in our ‘brain trust’.
To download the 2010 Global Manufacturing Competitiveness Index, please visit www.deloitte.com/globalcompetitiveness.

I recently returned full time to Leeds Met as a Professor of Organisation Learning. When I told one of my clients, his first response was ‘Yes, well done and about time too’ and his second response, after a moment was “but what does ‘organisation learning’ mean?”. And, what relevance does this have to leaders in manufacturing businesses in the current economic climate? Read on.

Consider the two terms, Organisation and Learning. The first implies co-ordinating and bringing things into some kind of order – you get things organised and working with some kind of clarity and direction. Learning is about upsetting the status quo or the current kind of order. Hence the contradiction.

To understand the value of thinking in contradictions requires a bit mental gymnastics and is one of the reasons so many businesses have been unable to cope in recent years. Organisation and Learning may be in tension, but they have to be reconciled. The danger of missing this trick can be found by considering each part in separation, for example by putting effort into organisation at the expense of learning. This can appear very enticing, after all to be organised means that work is proceed as planned, against targets with great clarity. Things are done on time and efficiently. People know how to do things right and any training can correct those who don’t. Continued emphasis on organisation allows improvement by eliminating waste and doing things faster by resetting targets, etc.

The danger is that you sucked into what is clear, ignoring other possibilities or assuming that things will carry on as before, so that any changes from outside are not considered before it’s too late. As the saying goes, ‘if you do what you always do, you get what you always get’. But supposing the customers change their minds about what you do? So concentrating on doing things right, could mean you miss doing the right thing. This is where learning as a disturbance comes in.

The disturbance could involve changes for what people do at work, the things that are produced and how they are produce. Learning as disturbance can also come from exploring what customers and suppliers think and want.

The idea of the Learning Organisation became very popular in the 1990s. It was a lovely ideal that could help any business change radically. However, many managers and leaders found they simply did not have the access within their organisations to enable them to initiate, promote or sustain approaches that required an organisation that ‘continually transformed itself’. Another problem is that when business is struggling to meet or even find orders, there is not a lot of time for learning, even if the evidence says you should (findings from a very important piece of research on creating space for learning in SMEs can be found at; http://www.esrcsocietytoday.ac.uk/esrcinfocentre/viewawardpage.aspx?awardnumber=RES-334-25-0015 ).

The problems of being too organised are tackled by more space for learning as disturbance. And the problem of wasting too much time exploring for learning is to make sure you are better organised. This sounds like setting up a competition between organisation and learning but that’s the nature of contradiction and the source of its potential for responding to difficult times now and in the future. You need to consider the interplay of these two processes by providing support for both organising and learning. If you can do this, you become a two-sided thinker and doer or, in a word that reconciles contradiction, ambidextrous

If you would like to read more about the Ambidextrous Organisation, contact me at j.gold@leedsmet.ac.uk and I will send you a very useful article with key ideas for what to do.

Although UK manufacturers have been through some tough times, our latest survey of UK manufacturers has some encouraging news with almost two-thirds of manufacturers (62 per cent) expecting the availability of credit to remain the same or improve in the coming 12 months. It also reveals that the industry is responding positively to the economic challenges by making use of available public sector funding, with 63 per cent declaring a good understanding of available grants and incentives whilst 33 per cent of manufacturers have sought capital from alternative sources such as shareholders or parent companies.

The overriding message is that while the market is tough, manufacturers have been resilient in their response. The easing of available credit is very welcome, but there are no signs of complacency with manufacturers seeking other appropriate sources of finance where necessary. Manufacturers have also proactively sought to limit their exposure to bad debt, with 65 per cent increasing the frequency of customer credit checks over the past 12 months.

The survey highlights grant funding as one area where there is still some room for improvement. Whilst the majority of manufacturers have a good understanding of grants and other incentives, a significant minority remain in the dark. Almost one in five said they did not know where to look for information on grants, for example, with another 19 per cent not yet having considered grants as a source of funding – this suggests that some manufacturers are losing out on additional funding.

The report found that 55 per cent of manufacturers intend to invest in plant and machinery over the coming 12 months, with 54 per cent of respondents intending to invest in new product development. This shows the appetite for investment from the industry so we would encourage all manufacturers to take advantage of the funding available to them. This will be important as manufacturing emerges from the recession and looks to a future which will require investment in R&D, training and retraining and capital expenditure on new plant and machinery.

Overseas markets

The report also asked manufacturers about their intentions for the coming 12 months, focusing on investment and exports. Seventy-one per cent of respondents said they expected to increase their exports over the next 12 months, with 41 per cent planning on a double-digit increase. However, a sizeable minority of 29 per cent expected no increase at all. Seventy-five per cent of manufacturers will focus their export strategy on the Eurozone. The US and China were identified as the other key regions, with 45 per cent looking to increase trade with the US and 30 per cent with China.

These are confident figures from UK manufacturers, without being overly bullish. As the comparative value of sterling remains low and confidence in global markets picks up, there will be opportunities for manufacturers to increase their exports. However, for every willing seller you need a willing buyer and as growth in many of the major economies remains anaemic the extent to which this can happen is to some degree out of UK manufacturers’ hands.

(Survey was carried out 2-9 February 2010 by Findlay Media in association with Deloitte, and surveyed 101 manufacturers based in the UK. “Pound for Pound” is the second in a series of quarterly Point of View surveys examining key issues affecting UK manufacturers in seeking access to finance. The full report is available at www.deloitte.co.uk/pointofview