Who is getting R&D tax credits?

In the tax year 2021/22, businesses received 11 per cent, or £7.6 billion, more R&D tax relief than they had the previous year, according to HMRC’s R&D Tax Credits Statistics: September 2023. This equates to £44.1 billion spent on eligible R&D, 8 per cent higher than the previous year’s total.

On face value, that’s a positive for the economy. Periods of high innovation tend to be followed by high productivity growth.

However, these overall figures only tell a part of the story.

The R&D tax relief system, as explained by BDO UK, “can provide valuable financial support if you are a business that is investing in innovation and developing new processes, products or services”.

It is available to businesses of all sizes, but has been criticised for being overly complex – and complexity can exclude some otherwise eligible smaller businesses. Last week’s report from the House of Lords quoted Lord Leigh of Hurley, Chair of the Finance Bill Sub-Committee: 

“We struggled to understand what the Government was trying to achieve by requiring additional data from employers and individual taxpayers. Additional burdens should not be placed on businesses unless there is a compelling reason to do so.” 

Is R&D tax relief accessible for SMEs?

Accessibility is in the eye of the beholder.

All SMEs, for instance, can now apply for HMRC’s Advance Assurance for R&D expenditure via an online form. Prior to claiming, however, a Claim Notification must be filled and delivered. The business must then wait to be contacted by HMRC, typically via telephone, and a site visit by HMRC may or may not follow.

All of this, understandably, is to prevent abuse of the system via false claims – the same reason the RDEC scheme, utilised by larger organisations, and the SME tax credit scheme are being combined from April 2024 onwards. 

But it does increase the administration burden for smaller businesses.

As Financial Accountant reported recently, the House of Lords warned the government against making the process so complex that it turns businesses off claiming.

“Businesses will be pleased that the government’s review of R&D tax relief has been completed and that they can now plan ahead with some much-needed certainty,” Leigh said.

“However, the government still has a lot of work to do in terms of the early publication of the regulations and guidance relevant to changes and a realistic timetable.” 

There was also a recognition that more than £1 billion of R&D SME relief was lost to error and fraud in 2020/21. HMRC is treading a fine line between simplifying claims and discouraging fraudulent claims.

What the R&D tax credit numbers tell us

The number of R&D tax credit claims increased 5 per cent from 2021 to 2022, to 90,315 claims. This increase, the report says, came from across both the RDEC scheme and the SME scheme.

The average value of each claim rose by 6 per cent from 2021 to 2022, and 67 per cent of claims came from companies operating in the information and communication; manufacturing; and professional, scientific and technical sectors.

A total of 32 per cent of the claims amount went to companies with registered offices in London, with another 18 per cent going to companies with a registered office in the South East. However, this doesn’t necessarily indicate where the R&D activity took place. 

How many first-timers made claims?

Arguably, the success of an R&D tax relief programme can be measured by the number of first-timers who made claims. Does the programme encourage more businesses to participate in R&D, or does it turn them away?

On this measure, the news is not positive. Not for SMEs, at least.

“In the tax year 2020 to 2021, there was a 1 per cent decrease in the overall number of first-time applicants from the previous year,” the HMRC report said. “This is the second consecutive decrease in the number of first-time applicants.”

“This decrease is driven by a reduction in the number of first-time applicants within the SME scheme. First-time applicants to the RDEC scheme have increased each year since the 2017 to 2018 tax year.”

In fact, in the SME scheme from 2020 to 2021, there was a decrease of 3 per cent in first-time applicants. In the same period, the number of corporate applicants to the RDEC scheme increased 14 per cent.

It’s yet to be seen whether these negative figures among SMEs are connected to COVID interruptions, or whether the SME scheme has simply been too complex for smaller entities.

Businesses involved in R&D should seek advice from their accountants to prepare for the April merger of the SME and RDEC schemes. For SMEs, the programme is worth around £25 of tax credits per £100 of R&D spend, or £33 of tax credits per £100 of R&D spend for SMEs making a loss. That could be valuable advice, indeed.

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