Manufacturing Industry UK R&D Tax Credit Expenditure

R&D and manufacturing go hand-in-hand as the sector significantly contributes to the UK’s economic growth, playing a vital role in driving innovation and technological advancement. Indeed, currently 21% of all R&D Tax Credit claims come from manufacturers.

But how is this vital industry fairing? Manufacturing, like other sectors, has faced big challenges following Brexit including the global pandemic, the war in Ukraine and political turmoil in the UK. At the start of the year, many publications reported that the manufacturing industry is due to contract in 2023.

While recent conditions have been undeniably challenging, by taking a closer look at HMRC’s R&D Tax Credits Statistics, it’s clear that growth for the manufacturing industry has been struggling for the last few years.

Manufacturing R&D Tax Credit claims

According to HMRC’s data, the number of Manufacturing R&D Tax Credit claims has been increasing YoY, but growth has slowed.In the 2020–21 tax year, the number of R&D claims from the manufacturing sector increased by 3%, with 18,795 claims in total. This breaks down to 15,960 SME scheme[DB1]  claims, 1,300 RDEC claims from large organisations, and 1,535 RDEC claims from SMEs.

While the 3% growth is positive, it is part of a clear trend of slowing growth experienced since the 2018-19 tax year (see both tables below).

All eyes will be on HMRC’s 2023 R&D Tax Credits Statistics report, when it is published, as this will reveal if the slowing growth turns into a decline.

Amount of manufacturing R&D Tax Relief claimed

As well as slowing growth in the number of claims, the amount of R&D cash relief claimed by the manufacturing sector has been in decline since 2018-19.

The 2020-21 tax year was challenging for everyone as the overall amount of R&D relief claimed across all sectors decreased by 12%. For manufacturing specifically, it went down by just 8% – weathering slightly better than many other sectors.

If we drill into this further, we can see why the decrease for manufacturing wasn’t quite as pronounced. While the amount of relief claimed under the RDEC scheme noticeably dropped by 15%, the decrease in relief claimed by SMEs wasn’t so severe – dropping by just 0.6% in 2020-21 following a period year-on-year growth over the past few years.

Manufacturing research and development expenditure

Overall, R&D expenditure declined by 11% in the 2020-21 tax year. Manufacturing R&D expenditure did slightly worse than average, dropping by 15% – from £11,525M in 2019-20 to £9,825M in 2020-21. This continued a downward trend of expenditure in the manufacturing sector, which started in the 2019-20 tax year.

R&D expenditure is a solid indictor of the health of an industry, as it showcases both investment and innovation. The continuing decline in manufacturing R&D expenditure is therefore a concerning trend.

Where does manufacturing take place in the UK?

HMRC’s R&D stats do not report on industry activity by region, however, Make UK examined how manufacturing was spread around the UK, by breaking down 2020’s output:

Manufacturing’s contribution to the UK economy

Manufacturing is a major contributor to the UK economy. According to stats from Make UK, the manufacturing sector:

The importance of UK manufacturing to the success of our overall economy makes the recent decline in manufacturing R&D expenditure particularly concerning

The biggest challenges facing the UK Manufacturing sector

According to a recent government briefing paper on Securing Britain’s industrial future, the biggest challenges facing manufacturing industries include:

Fortunately, if you are an energy intensive manufacturer, you may be eligible for Energy Tax Reliefs.

R&D Tax Credits in the manufacturing industry

Manufacturing is a critical sector for UK economy, providing employment opportunities, contributing to GDP growth, and driving innovation. R&D Tax Credits[DB1]  can provide a vital lifeline for manufacturers, especially during challenging times.

Do you work on innovative solutions in the manufacturing industry? Your business may be eligible for significant tax relief. Find out more on how we support manufacturers claiming R&D Tax Credits.

If you found this article interesting, you might also enjoy our white paper on Research and development (R&D) Tax Credits statistics 2022 as well as our analysis of FinTech Companies UK R&D Tax Credit Expenditure.