R&D tax relief claims are rising, HMRC report reveals

On 27 September, HMRC released the statistics for Research and Development (R&D) tax credit “for 2000-02 to 2016-17 and [they] are based on returns received on or before 30 June 2018,” the report states. Many accountancy firms believe that the evidenced upward trend in submitted claims is highly positive when considering the future of the UK’s business innovations.

When first introduced in 2000, R&D tax credits were put in place to encourage innovation and increased spending in R&D. In the eighteen years the initiative has been in place, over 240,000 claims have been made – a total of £21.4bn.

Mark Tighe, CEO of Tax Relief Specialists for Catax, pointed out that the “Government is aware that Britain has a global reputation for innovation and so is actively trying to encourage firms of all sizes to invest in R&D.”

Caroline Hunt, Director at National Audit, Tax, Advisory and Risk Firm for Crowe UK, said: “Given that the majority of those companies using R&D tax credits are small and medium-sized enterprises (SMEs), the uptake in the relief used could encourage many innovative businesses to grow and expand and reach their full potential.”

For 2016-17, 39,960 R&D tax credit claims were made. 34,060 of these are in the SME R&D scheme, and yet there are still more claims to come as submissions remain open.

The total amount of R&D support claimed by businesses has increased by 25%, bringing the total for 2016-17 to £3.7bn. 75% of these claims were for under £50,000, with the current average being valued at £53,000.

According to HMRC’s report, “the ‘Manufacturing’, ‘Professional, Scientific and Technical’, and ‘Information and Communication’ sectors continued to have the greatest volume of claims, making up a total of 71% of claims and 75% of the total amount claimed for 2016-17.”

James Tetley, Partner and National Head of R&D at RSM agreed with these overarching feelings of optimism. He said: “The continuing increase in both the quantum and number of claims being made is of course welcome news.”

Nonetheless, although there has clearly been an increase in claims made, many companies are still not claiming the tax relief they are entitled to. HMRC’s evidence has shown that companies are choosing to rely on their advisors to bring R&D to their attention. This has led to a rush of retrospective claims in the final 12 months.

Luke Hamm, CEO of GovGrant, said that “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.

“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 benefitting from their inventions and intellectual property.”

Atul Kariya, Head of Manufacturing at MHA MacIntyre Hudson, added: “UK productivity still languishes far below that of its European counterparts, and this represents one of the most significant obstacles to growth and improving living standards in the country.”

So, despite the fact that there is an increase in the percentage of companies making a claim, this upsurge is not fast enough to assuage remaining concerns.

Kariya added: “Until we do see improvements in productivity, the real acid test of any R&D tax credit scheme, and of industrial policy more generally, the jury will have to remain out on the effectiveness of the tax system to address one of the UK’s most persistent economic shortcomings.”

James Tetley outlined a further cause for concern when he argued: “However, [the percentage increase] also brings into sharp focus the operational pressure that HMRC face in processing and risk assessing these claims, ensuring the right companies make claims, but also that these claims are processed in a timely manner.”

He goes on to outline how, according to RSM’s research, there is a significant backlog when it comes to HMRC’s processing system. Some companies reported having to wait for over six months.

Tetley concluded: “We can only hope that these figures serve as a prompt to re-commit greater resources to operationally managing the R&D schemes, which are a crucial support to growing innovative UK businesses.”

To read HMRC’s full report, click here.