R&D tax credits: where are we today?
26th October 2020
Research and development is going to play a huge part if the UK is going to combat what could well be a very tough recession. We have always been recognised as a highly innovative nation but that reputation is going to be tested as we look to deliver the products and services needed to recapture international attention and stimulate sales.
One incentive that could prove crucial is the Government’s R&D tax credit scheme.
According to a study compiled by HMRC in 2015 every £1 of relief the R&D tax credit scheme awards leads to the additional £2.35 being invested in R&D. However, as so much money has had to be found to support COVID related reliefs like the furlough scheme, can the government afford to maintain this essential incentive and encourage the rate of innovation the economy so desperately needs?
Although HMRC’s time series data shows a huge increase in applications (in 2013 1100 large companies and 1000 SMEs applied for R&D credits while it is forecasted that 2018 figures will show this has grown to 3936 and 4506 respectively), it is still not wholly accepted the scheme has – up to this point at least – been a success.
When one digs a little deeper into these figures it soon becomes apparent that despite the fact HMRC has reported a continual increase in R&D spend, over 57% or SMEs and 41% of large companies are claiming for less that £50,000 in reliefs. This may be the case with an SME but surely for our largest businesses this has to be disproportionate with what they are actually spending on R&D?
Part of this underestimation may be down to board members not actually understanding the full scope of their R&D efforts.
However, as things get tougher financially introducing a more informed position by encouraging senior management, technical staff and finance to work together has to be established so that the potentially significant rewards are not overlooked.
It is also felt that increased stringency on HMRC’s behalf could also be playing a part.
Since the introduction of the credits, HMRC have been working harder and harder to identify bogus claims. Indeed there have been many reports in the press about specialist ‘advisers’ providing clients with dubious advice that has led to the uncovering of a number of falsified claims and the potential for this type of could be putting some companies off taking full advantage.
While there are question marks over the total being claimed by larger companies, it appears more and more SMEs are claiming R&D credits.
Although there are a number of factors driving this trend, ease of use is a definite contributor. Before R&D tax credits were launched in 2013 there were always concerns that the previous system did not offer the same level of cash benefits that the current system does. As such, many companies simply chose not to make a claim.
According to the figures, this point of view has reversed.
The fact the current system now allows both profit and loss making companies to make a claim has also added to its popularity, especially as there is so much more certainty as to the amount pre-profit businesses will receive. Given the length of time that innovative businesses tend to remain in a pre-profit stage while they work towards the point there products is ready to be taken to market, this has to be considered an improvement.
Having said that, HMRC have expressed concerns about the number of early stage businesses making claims. They feel that as these claims tend to be high in volume but low in amount (approximately 16,000 claims made by start-ups were under £10,000), they are taking up too much time and resource to process. They would obviously prefer to see the larger SME claims (i.e. those in excess of £50,000) achieve the predicted 27% increase.
So where should we expect this growth to come from?
Software is the obvious answer. When it comes to researching and developing solutions for the problems they face, most businesses turn first to software. As a result it seems obvious that this will drive a growing number of ICT based claims.
However, one of the UK’s most traditional industrial powerhouses – manufacturing – cannot be discounted.
The UK is still home to more than 100,000 manufacturing businesses. Despite often being overlooked in favour of the tech sector, manufacturers are continuing to innovate in a number of areas in response to the increased cost-sensitivity of their customers and growing competition from all over the world.
As a result they are consistently finding new ways to improve cost-efficiency and streamline their processes by designing new tools equipment and controls and improving the automation involved in certain tasks.
As a result manufacturers still receive the third highest amount of R&D tax credits, £595m. Though saying that, the average claim amount is just under the UK average at £50,021 and the 11,895 claims are slightly down on the previous year’s total.
But even if you are not involved in tech, manufacturing or even some form of industrially focused science, we would urge you to take a closer look at what you are doing to improve the way you work. If you can prove you have:
- Changed your overall structure and/or the way you operate
- Analysed which markets or products you need to focus on
- Changed or adapted the systems and business processes you use
- Reviewed your manufacturing processes in order to meet safe social distancing requirements
- Focussed on developing new ideas or products
- Researched new ideas that didn’t work or did not take off within your chosen market/s
You could well be eligible to claim for an R&D tax credit and recoup cash that you can use to the immediate benefit of your business.
If you would like us to either help you work out if you have a claim or assist you with putting a claim together, please email Mark Hook at firstname.lastname@example.org or call us on 0116 2827000.