The number of manufacturing companies falling into administration in the first quarter of this year declined by 18 per cent to 86 compared with 105 in the same period last year, according to research by Deloitte, the business advisory firm. 

David Raistrick, UK manufacturing industry leader based at Deloitte in Leeds, comments:

“The manufacturing sector has shown positive signs of recovery, over the past 12 months and this reflects a healthier industry. Orders picked up throughout last year, driven by a recovery in end demand. The 20 per cent decline in sterling against the euro has undoubtedly helped to give a much needed boost to exports in the sector.  There were fewer administrations in this sector in 2010 than in any of the previous three years.

“This trend is encouraging but the Q1 2011 figures lend a note of caution to this optimism.  The number of administrations in Q1 2011 is higher than the previous three quarters in 2010 possibly indicating that demand is softening. This, combined with recent data on purchase orders is less encouraging, and we cannot preclude a further rebound in these figures if the recovery in demand is not sustained,” said Raistrick.

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

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