The Government maintains ambitious plans for the use of the research and development (R&D) tax relief system, with a target for the schemes to boost the UK’s total R&D expenditure to 2.4 per cent of GDP by 2027.
This long-term goal, supported by the generous R&D tax credit system, will play an essential role in the UK becoming one of the world’s most innovative nations, but will this growth be shared equally?
At the moment, whilst the number of R&D tax credit claims is on the rise – up by 16 per cent in the year ending March 2020 (the latest HMRC data) – much of the support is directed towards London and the South East.
In fact, companies with registered offices in London accounted for 20 per cent of total claims and 31 per cent of the total amount claimed in the latest figures from HMRC.
Meanwhile, businesses based in the South East, in areas like Surrey, Kent and Essex, accounted for another 15 per cent of total claims and 18 per cent of the total relief claimed.
That means combined these two regions made up 35 per cent of all claims in the UK and, more incredibly, almost half (49 per cent) of all the support given by these reliefs went to these areas – that equates to around £3.6 billion worth of tax credits and relief.
In comparison, the North West had the third-largest number of claims but was only the fifth largest region based on the amount claimed, and in both instances, the figures show it was well behind London and the South East.
The Government has been keen to extol the benefits of its ‘levelling up’ policies recently, which are intended to better distribute income, investment and opportunities across the UK.
However, there are clearly significant regional differences in the number of people claiming R&D tax relief as well as the amount of relief obtained by businesses.
This disparity has a clear north-south divide, but it is also evident in the types of industries that claim and the size of the businesses that access these schemes.
Large vs small
According to the latest data, when it comes to the amounts claimed, the difference between large and small businesses is evident.
Large businesses using the R&D expenditure credit (RDEC) accounted for just five per cent of the claims made (4,379 claims in total) but received 36 per cent of the tax relief given in the year ending March 2020. That means on average, each claim by a large company was worth £617,848 – either as a cash credit or in Corporation Tax relief.
In comparison, small and medium-sized businesses (SMBs) using the SME scheme or piggybacking on work done for larger firms via the RDEC scheme, accounted for 95 per cent of all claims (81,530 claims in total) but only received 64 per cent of the tax relief provided.
As a result, the average value of an SMB claim (where the relief given by the SME scheme and work as a subcontractor through the RDEC scheme are combined) was just £58,505.
These numbers are somewhat skewed by the greater R&D expenditure required within larger businesses and the terms of each scheme, but even so, it is clear that the amount of relief claimed by large companies is far greater than small and medium-sized ones.
Thankfully, the use of the SME scheme is on the rise, increasing by around 16 per cent in the latest year recorded.
Nevertheless, there remains a strong imbalance in the value of support obtained from the R&D tax relief schemes, which should be addressed in future reforms to or updates to this tax relief system.
Myths continue to persist about the type of businesses that are eligible for R&D tax credits, with many businesses continuing to assume that only the most innovative companies can apply for this impressive tax relief.
This sentiment is reflected in HMRC’s data on the sectors with the greatest volume of claims from the Information and Communication, Manufacturing, and Professional, Scientific and Technical sectors, which made up 64 per cent of claims and 69 per cent of the total amount claimed for the year ending March 2020.
In fact, the concentration of the number of claims in these sectors is:
- Information and Communication (22 per cent)
- Manufacturing (22 per cent)
- Professional, Scientific and Technical (19 per cent)
Whilst the coding of industry sectors may not always reflect the true sector of companies’ R&D activity, there is an obvious bias towards a certain type of industry that is claiming these tax reliefs on their expenditure.
This bias should not be as strong given the broad eligibility criteria for R&D tax credits. According to the rules, the expenditure that qualifies for R&D relief must be part of “a specific project to make an advance in science or technology”.
Applicants only need to explain and demonstrate how their project looked for an advance in science and technology, overcame or attempted to overcome uncertainty and could not be easily worked out by a professional in the field.
The project doesn’t even have to be commercially successful, and you can claim even it makes a loss. What’s more the scheme not only covers new processes, products or services, but also improvements to existing ones.
Successful claims have been made in a wide range of sectors from dentistry to agriculture. More needs to be done to make the availability of this tax relief clear so that more businesses feel that they can claim.
A brighter future for R&D
Although it is difficult to put an exact figure on the amount of R&D tax relief that has gone unclaimed, some have suggested that it could be upwards of £84 billion.
As the latest figures show, there is a clear disparity between the businesses that do and don’t claim, with the sector, location and size of a business playing a key role in whether a claim is made, and the amount of relief received.
If this, or any future Government, is committed to truly levelling the playing field for businesses across the UK then the availability and accessibility of R&D tax reliefs must be included in their strategies, as they play such an essential role in funding innovation.
By Andy Wilson, Head of Tax at Ascendis