Under The Microscope With HMRC's Research & Development Tax Credits Statistics
NATIONAL STATISTICS: SEPTEMBER 2023
What are R&D Tax Credits?
The Research & Development (R&D) Tax Relief scheme, sometimes referred to as 'R&D tax credits', is a government incentive that rewards companies working on innovative projects. Businesses spending money developing new products, processes or services, or improving on existing ones, are likely to be eligible for the scheme if those changes advance, or intend to advance, science and technology in their industry.
Key Points
(11% higher than previous year)
(8% higher than previous year)
(5% higher than previous year)
6% Increase In Average Claim Value
Based on HMRC’s latest update, released last week (28th September), UK businesses continued to make major strides in the world of Research and Development, and the number of claims reflects that commitment to innovation. 2021-2022 saw impressive surges in activity: the estimated total R&D tax relief support claimed soared to £7.6 billion, marking an 11% increase from the previous year. This corresponds to a substantial £44.1 billion in R&D expenditure, showing an 8% uptick.
Moreover, the total number of R&D claims rose significantly, driven by increased claims in both SME and RDEC schemes.
Notably, there’s been a 6% boost in the average value of claims in 2021 to 2022, with the SME scheme leading the way with a remarkable 9% increase. This may be attributed to businesses bouncing back from the COVID-19 pandemic, which affected R&D activities in the previous year, but may also be indicative of increasing confidence claiming under the scheme. Confidence, we hope, isn’t lost due to more recent changes to the claiming procedure.
The data included in this article is pulled directly from a ‘National Statistics’ publication produced by HM Revenue and Customs (HMRC).
It provides information on the number of companies claiming Research and Development (R&D) tax credits and the associated cost to the Exchequer for claims covering accounting periods that end in a particular financial year, in this case 2021-2022.
Claims for the tax year 2021 to 2022 can still be submitted past the cut-off date for this publication. Statistics will be revised in next year’s publication to include claims received after the cut-off date, which can sometimes result in large changes between the publications. Similarly, this year’s HMRC publication will revise figures for tax years 2019 to 2020 and 2020 to 2021.
The next release is planned for Autumn 2024.
Claims in 2021-2022
Notable Increase in Claims:
The data shows a significant rise in R&D tax relief claims for the tax year 2021 to 2022. The total number of claims increased by 5%, reaching 90,315 claims. This upward trend indicates that more businesses are recognising the benefits of R&D tax relief and are actively engaging in research and development activities.
Diverse Participation:
The increase in R&D claims is not limited to a particular sector or type of business. Both Small and Medium-sized Enterprises (SMEs) and large companies contributed to this growth. SMEs accounted for the majority of claims, but large companies also played a substantial role in driving up claims under the Research and Development Expenditure Credit (RDEC) scheme.
Impact of Relief Rate Changes:
The government's decision to decrease the SME enhancement rate and SME credit rate while increasing the RDEC rate could alter the dynamics of R&D tax relief. These changes are intended to encourage more substantial companies to engage in R&D activities, but may turn off smaller companies as claim values become less commercially viable. R&D tax relief consultancies must consider how they will cater for smaller businesses to ensure they're not priced out of the scheme.
It's important to note that the data provided doesn't yet reflect the impacts of the recent relief rate adjustments announced in the 2022 Autumn Statement and the Spring 2023 fiscal event. These changes are expected to influence how businesses approach R&D tax credits in the upcoming years, and the data in future publications will likely reveal the extent of these effects.
R&D Expenditure
Qualifying Research and Development (R&D) expenditure reached an estimated £44.1 billion, marking an impressive 8% increase from the previous year. The lion's share of this expenditure, around 60%, was attributed to companies utilising the Research and Development Expenditure Credit (RDEC) scheme. This surge in R&D expenditure, may be indicative of increased R&D activity following the COVID-19 pandemic. Increased R&D expenditure indicates that companies are investing more in innovative research and development activities. This not only fosters innovation and drives business growth but also positions these companies favourably to claim tax relief, which can significantly reduce their tax liabilities or provide cash payments. Ultimately, it's a win-win scenario for businesses, as they contribute to their own growth while benefiting from government incentives to support their R&D endeavours.
R&D By Region
Analysis of R&D tax relief reveals shows a large regional disparities, though this reflects the registered office addresses for companies and doesn't necessarily align with where the actual R&D activities take place.
London stands out as a major hub, with companies in the capital accounting for 22% of the total number of claims and a substantial 32% of the total amount claimed. Similarly, the South East boasts 15% of total claims and 18% of the total amount claimed. Interestingly, the East of England, while ranking third in terms of the amount claimed (11% of the total), falls to fourth place when considering the number of claims. The North West has the third-largest number of claims but ranks fourth in terms of the amount claimed. These proportions have remained relatively consistent in recent years.
Claim Numbers VS Claim Values
The latest data reveals a concentration of R&D tax credit claims in the lower cost bands, with approximately 69% of claims falling within the cost bands up to £50,000. This concentration predominantly corresponds to claims made under the Small and Medium-sized Enterprise (SME) scheme, where businesses typically have lower R&D budgets. This highlights the prevalence of R&D activity happening within smaller enterprises that might not typically view themselves as ‘R&D companies’.
Amount Claimed Concentration:
The latest data reveals a concentration of R&D tax credit claims in the lower cost bands, with approximately 69% of claims falling within the cost bands up to £50,000. This concentration predominantly corresponds to claims made under the Small and Medium-sized Enterprise (SME) scheme, where businesses typically have lower R&D budgets. This highlights the prevalence of R&D activity happening within smaller enterprises that might not typically view themselves as 'R&D companies'.
In essence, this analysis illustrates a dual pattern: a high volume of claims in the lower cost bands driven by SMEs and a concentration of substantial claims in the ‘Over £2 million’ band, typically attributed to larger corporations. This distribution reflects the diversity in R&D tax credit claims, catering to businesses of varying sizes and R&D capacities.
Number of individual R&D tax relief claims, banded by claim value:
Amount (£million) of R&D tax relief claimed, banded by claim value:
Reduction in first time SME claims as RDEC claims rise:
According to the latest available data, there where were 16,240 first-time applicants in the SME scheme, marking a 3% decrease from the previous year. This reduction represents the second consecutive year of decline, following a period of continuous growth in prior years.
Conversely, the RDEC scheme, predominately aimed at larger businesses, saw a notable increase in first-time applicants. In the tax year 2020 to 2021, there were 2,705 first-time applicants, reflecting a substantial 14% growth compared to the previous year. This scheme has witnessed consistent growth in first-time applicants in recent years.
Error and Fraud
The most recent update does not elaborate on error and fraud directly, but does suggest reading HMRC’s approach to Research and Development tax reliefs, published in July 2023.
In the document, HMRC speaks to a multifaceted approach to combat R&D (Research and Development) tax fraud. Here's a summary of their approach:
Resource Allocation: Over the past three years, HMRC has significantly increased the number of staff dedicated to R&D compliance. This includes an additional 300 people specifically addressing non-compliance.
Creation of R&D Anti-Abuse Unit: In July 2022, HMRC established a dedicated R&D Anti-Abuse Unit to tackle incorrect claims and investigate complex cases.
Additional Measures: HMRC has introduced various measures, including payment identification and verification controls, to ensure that claims are legitimate. These efforts aim to pay 85% of payable claims within 40 days.
Policy Changes: The government has announced policy measures to counter non-compliance, such as requiring digital claims, requesting additional information to identify high-risk claims, and reducing payable relief in the SME scheme for offshore companies with minimal UK operations.
Use of agents: HMRC has acknowledged the role of agents (R&D Consultancies) in the R&D tax relief scheme and works with professional agents and bodies to improve the quality of advice.
Improving Insight and Risk Assessment: HMRC employs a risk-based approach to non-compliance, assessing claims based on risk levels and behaviours. They continuously seek feedback from customers and leverage data and qualitative insight to refine their risk assessment processes.
That's it!
That’s all the interesting information from HMRC’s latest update. All in all this should be looked on favourably from an R&D claimant’s perspective: From number of claims under the scheme, to overall expenditure, R&D has scaled upwards across the UK. Claim values have increased significantly, and particularly in the RDEC scheme, adoption by businesses continues to trend upwards.
The only major concern for businesses moving forwards, is around adjustments to the scheme in terms of SME claim value and increased compliance/process steps involved in making a claim, particularly a first claim. We’ll continue to advocate on behalf of businesses of all sizes and add services to cater for smaller businesses in a changing landscape.
About R&D Tax Services
R&D Tax Services is a research and development tax consultancy, helping innovative businesses across a wide range of industries claim the R&D tax relief they deserve.
Our team recognises the importance of R&D in advancing UK businesses, big and small, and we understand the time burden, resources and complexities of claiming tax relief for that R&D. These constraints often leave companies failing to get the tax relief they’re entitled to or under-claiming significantly due to unclear, often confusing guidelines about what constitutes R&D. As experts in R&D tax relief, we’re here to unblur the lines and create robust, defensible and maximised claims on your behalf.
We’re experienced tax professionals, accountants and technical experts with a deep understanding of the R&D tax relief regulations. We’ve worked in many of the industries we now serve and are ideally placed to understand your business’ R&D Activities. As part of HMRC’s panel on R&D, we stay up-to-date with the latest developments in the guidance, to provide our clients with the most accurate and up-to-date advice.
Not sure if you can claim?
Most companies we speak to are unsure if they should make n R&D claim at first. Generally speaking, if you can identify with any of the following statements, it may be worth speaking to us:
- We have, in the last three years, taken on a commercial risk in creating or updating new products or processes.
- We have created, changed or adjusted processes, products or materials.
- We have developed or created a product / service not readily available in the public domain.
- We have developed or designed bespoke solutions or projects.
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