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More businesses getting tax breaks for R&D investment HMRC records show

More businesses are claiming for tax credits for spending made on research and development with SMEs proportionally taking greater advantage of the benefit. The total number of claims for R&D tax credits for 2015-16 was 43,040, an increase of 22% from 2014-15. The number of SME claims rose by 23% to 36,820, while the total number of claims for the large company and RDEC schemes increased by 17% to 6,215. So far there have been 39,960 claims for 2016-17, of which 34,060 are in the SME scheme and 5,900 in Research and Development Expenditure Credits (RDEC), according to the HMRC.

The figures come from HMRC’s Research and Development Tax Credits Statistics September 2018 which provides information on the number of companies claiming Research and Development (R&D) tax credits and the cost to the Exchequer of providing that support. HMRC expects these numbers to increase as more returns are received.

The most common way for SMEs to claim R&D tax credits is by a deduction from corporation tax (CT) liability, with 18,230 claims made this way so far for 2016-17, compared to 6,810 claims made for a payable credit. Payable credits are claimed by loss-making companies which have no CT liability against which to set the deduction. The rate for payable tax credit claims increased to 14.5% of enhanced expenditure in 2014-15. This is likely to be one of the drivers behind the continuing strong growth in the number of payable credit claims. In some cases, a SME can first use its R&D tax credit to reduce its tax bill to zero, and then take the rest as a cash payment. In other cases, a SME with no tax bill might choose to take some or none of its R&D tax credit as cash, with the remainder being carried forward. All such cases are referred to as “combination claims”. There have been 9,020 combination claims made so far for 2016-17.

The majority of R&D claims are from companies with a registered office in London, the South East or the East of England (45% of all claims and 60% of the total amount claimed for 2016-17) – although HMRC points out the regional split is based on the registered head office location so may not be where all of the R&D activity takes place.

The greatest volume of claims comes from the manufacturing, professional, scientific, technical and information and communication sectors making up a total of 71% of claims and 75% of the total amount claimed for 2016-17.

R&D tax credits are a tax relief designed to encourage greater R&D spending and to greater investment in innovation. They work by either reducing a company’s liability to corporation tax or by making a payment to the company. There are three schemes for claiming relief: The Small or Medium-sized Enterprise (SME) Scheme; The Large Company Scheme; and Research and Development Expenditure Credits (RDEC). A SME may claim a higher rate of relief than a large company. Also, a SME which has no tax bill to reduce may claim a cash payment instead. R&D tax credits were introduced for SMEs in 2000 and extended to large companies from 2002.

Luke Hamm, chief executive officer of grant and tax consultancy Gov Grant, said: "It's great that the government is doing more than ever and the numbers are up – it’s good news for the UK economy. But too many businesses still don't know what they're entitled to so there's a need for much more education. With Brexit on the horizon, it is imperative that the household names globally recognise the UK as a destination of choice for innovation. Whilst the volume has increased rapidly, as most claims are now relatively small the government needs to consider if the support is enough to truly stimulate innovation as a key driver in the UK economy.

“Figures for Patent Box - a scheme enabling companies to apply a lower rate of corporation tax to profits from their patented inventions and intellectual property - show a 16% increase in companies claiming for the first time, but an 11.6% drop in the total number of claims. However, the Patent Box statistics stated that SMEs only benefited by £42m, a relatively small proportion of the total claimed (£945m), with 96% of total relief claimed going to large companies. And it’s concerning to see that the Information and Communication sector accounts for only 10% of the total claimed – this doesn’t align to the UK’s strategy to focus on a data-driven society.

“The government’s industrial strategy has its heart in the right place, but it’s still unambitious. Ministers need more imagination and drive. Aiming for 2.4% of UK GDP invested in R&D by 2027 is mediocre. We need to add greater support to the SMEs particularly when it comes to benefiting from their inventions and intellectual property. The UK is good at inventing things but not so good at supporting them. I’d like the government to do more to support SMEs and their intellectual property.”

 

 

 

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