A National Statistics publication has recently been produced by HM Revenue and Customs (HMRC). The data relates to the number of companies claiming Research and Development (R&D) tax credits in the UK by sector and region and the associated costs to the Exchequer covering the tax year 2020 to 2021.
The tax year in question was especially challenging for SMEs and large businesses due to Covid-19 disruption and the onset of major supply difficulties which prevented companies from carrying out normal levels of R&D activity. We know by speaking with clients that many of their R&D projects were impacted by these inescapable headwinds and, as one would expect, the challenges are borne out in the data.
- Total R&D tax relief support (including SME and RDEC schemes) claimed in 2020-2021 was £6.6 billion, 4% lower than the previous year.
- Total R&D expenditure was £38.1 billion which represents a 11% drop compared to the previous year.
- The average claim value decreased by 10% likely due to Covid-19 pandemic disruption inhibiting R&D project activity and investment.
- The number of R&D tax credit claims bucks this downward trend. In 2020-2021, claim numbers increased by 7% to 89,300 which was driven by a 7% increase in the number of R&D SME scheme claims (78,825 total).
- As in previous years, information & communication, manufacturing, and professional, scientific and technical sectors had the highest number of claims (62% of total claims and 70% of total amount claimed).
Number of R&D Tax Credit Claims Reached a New High
The role that R&D tax credit schemes has in rewarding British innovation and funding long-term business growth is stronger than ever. Despite total R&D investment and claim values decreasing, a 7% increase in claim numbers is indicative of the need for support in an unprecedented year and increasing awareness of the schemes.
Growth is underpinned by a 7% increase in SME scheme claimants with 51% claiming a deduction from Corporation Tax (CT) liability exclusively and 49% claiming payable tax credits, at least in part.
The driving factor of growth is due to more SMEs making claims within the SME and RDEC schemes rather than large companies. The number of SMEs claiming within the RDEC scheme increased by 20% in 2020-2021 at a time when the number of RDEC claims from large companies decreased by 9%.
Figure 1: Number of claims for R&D tax credits by scheme, 2014-15 to 2019-20
R&D Tax Claim Amounts Contracted by 4%
The amount of R&D tax relief/credits claimed in 2020-2021 is estimated to be £6.6 billion, a 4% reduction compared to 2019-2020 (£6.9 billion). A 13% reduction in support claimed through the RDEC scheme contrasts with a 2% increase in SME scheme support, a dynamic caused by several factors but most strongly by the Covid-19 pandemic.
The cost to the Exchequer of SME and RDEC schemes has increased over recent years, although an increase in raw claimant numbers is only part of the picture. The increase of the SME enhanced expenditure rate to 130% in April 2015 (up from 125%) and the increase in the payable tax credit rate from 11% to 14.5% in 2014 has indeed increased costs while also providing British innovators with vital funds for future R&D investment. The RDEC rate increased to 13% of R&D expenditure in April 2020.
Figure 2: Total support claimed through R&D tax credits by scheme, 2014-15 to 2019-20 (£ million)
Trend Busting Research and Development Expenditure During 2020-21
The effect of the Covid-19 pandemic on disrupting R&D activity and investment was particularly acute for large companies. The estimated 11% decrease in expenditure to £38.1 billion in 2020-2021 was primarily driven by larger companies who account for 59% of total expenditure, inclusive of SME and RDEC schemes.
R&D qualifying expenditure claimed through the SME scheme is predicted to have increased slightly in 2020-2021 which represents a slackening compared to the double-digit growth experienced over the previous 3 years.
Regional Distribution of R&D Tax Credit Claims Continues to Consolidate
Each year, HMRC details the regional distribution of R&D tax credit claims based on a company’s registered address. The concentration of total claims and total claim amounts remains highest in London and the south-east of England. For instance, those companies in registered offices in London account for 21% of total claims and 31% of total amount claimed; however, it is important to note that the registered address may not be necessarily where the R&D activity is carried out.
The United Kingdom has the most extreme economic disparities of any country in the EU. The UK has long-standing, deep-seated inequalities in prosperity, government expenditure and employment between regions, characterised by the dominance of the south-east of England and London. These disparities are reflected in HMRC’s regional analysis that show regional claim proportions similar to recent years.
Figure 4: Number of R&D tax credit claims by region of company registered address, 2019-20
Figure 5: Amount of R&D tax credits claimed by region of company registered address, 2019-2020 (£ million)
62% of Total R&D Claims Concentrated in Three Sectors
As one might expect, R&D tax credit claim numbers and amounts are concentrated in sectors where undertaking qualifying R&D activity is more important for long-term competitiveness and growth. This requirement is particularly acute for manufacturing, information & communication, and professional, scientific and technical sectors that are estimated to have accounted for 62% of total R&D claims and 70% of total amounts claimed in 2020-2021.
Figure 6: Number of R&D tax credit claims by industry sector, 2019-20
Figure 7: Amount of R&D tax credits claimed by industry sector, 2019-20 (£ million)
Cost Care Tax View
The 2020-2021 financial year presented a myriad of challenges to small, medium and large UK businesses alike. Despite the challenges stemming from the pandemic, businesses continued to innovate throughout the year, particularly SMEs who demonstrated a high level of resilience compared to larger organisations.
The number of businesses claiming R&D tax relief rose which demonstrates the adaptable and resolute nature of SMEs in the face of back swan events and major labour and material supply disruption.
The increase in SMEs claiming under the less generous RDEC scheme may be due to HMRC’s revised interpretation of ‘subcontracted and subsidised R&D’. Although a First-Tier Tax Tribunal case has successfully challenged HMRC’s narrow interpretation, uncertainty remains as to whether SMEs with subcontracted/subsidised expenditure should claim under either RDEC or SME schemes. Our view is that the interpretation wrongly denies enhanced R&D relief to those SMEs that seek commercial gain from their R&D activity. Consultations are currently ongoing.
Consultations are ongoing into simplifying the R&D schemes, with some mooting an ‘RDEC for all’ that would retain higher rates of relief for SMEs. With more SMEs claiming under RDEC during 2020-2021, consolidating claims under a single scheme may simplify the process and remove uncertainty.
We are disappointed that the National Statistics publication focuses purely on the costs without analysing the considerable benefits that R&D tax relief schemes have on British innovation, efficiency and broader economic outcomes. We would welcome a revised methodology for future publications as value is a crucial part of the equation in any R&D analysis.
We will provide updates to clients and accountant partners regarding the results of ongoing consultations and any future policy changes that impact R&D tax relief claims.
Choosing the right tax consultant is more important than ever
Businesses and accountants should be aware that, whilst well substantiated R&D tax claims are hugely beneficial to UK companies, exaggerated and unsubstantiated claims can be highly deleterious. Placing faith in newly established R&D tax advisors who won’t be around to defend your case can lead to major issues if HMRC decide to launch an enquiry. It is especially important for business owners who are seeking to sell their business or creating an exit strategy to avoid forming relationships with unscrupulous tax consultants.
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We’ve been in the tax business for over 25 years and have claimed back over £110 million in R&D tax relief for thousands of innovative businesses. From initial assessment through to the submission of a comprehensive report, your claim will be managed by tax experts who will be honest about what qualifies and what does not.
If you have any questions regarding the National Statistics report or require assistance in preparing or submitting R&D tax relief claims, please contact email@example.com or call 0161 904 0044.