Value of UK R&D tax credits underscored by new stats
Each year, HMRC releases an in-depth compilation of statistics analysing UK R&D tax credit claims from previous years. While these reports always provide useful insights into the relevant use and benefits of the credits, the 2020 edition provides a particularly positive outlook. More companies are benefitting than ever before, and the amount of relief claimed is on the rise.
There’s never been greater potential benefit for companies performing research and development in the UK.
Understanding the UK R&D credits
The UK incentivises investment in local research and development by providing a variety of targeted tax credits. The two primary UK R&D credits are the SME scheme and the research and development expenditure credits (RDEC) scheme. These credits can either reduce a company’s corporation tax liability or provide a direct cash payment to the company.
The UK R&D tax credits free up cash flow and encourage spending on innovation. They are available to any eligible company with a presence in the UK. Even if a company is based outside the UK, it may have an opportunity to claim a UK R&D tax credit if it is performing and investing in R&D activities in the UK.
R&D credit claims are on the rise
While the latest report only provides early projections for claims from the 2018-19 financial year and focuses more on comparing the 2017-18 to the 2016-17 financial years, it nonetheless illustrates an upward trend in both the number and amount of R&D credits claimed, as well as the total R&D expenditures.
- The total number of claims jumped to 62,095 for the 2017-18, an increase of 17%.
- The total value of R&D expenditures was £5 billion in 2017-18, an 8% increase.
- The total amount of R&D claims increased by 15%, reaching £1 billion in 2017-18.
- The projected total amount of R&D claims for 2018-19 is £3 billion.
Companies are catching onto the value of the UK R&D tax credits, but these trends show that the incentive is also driving more innovation and, in turn, more investment in R&D.
Younger companies are leading the way
Start-ups and young companies often think they won’t be able to benefit from the UK R&D credit, but the numbers tell a different story. Young companies are actually leading the pack in the number of UK R&D claims, with companies younger than five years making up 23% of all R&D claims for 2018-19. Likewise, small companies dominate in the number of R&D claims, with 72% of all claims falling under £5,000.
This trend is likely influenced by the huge potential benefit to companies claiming R&D under the SME scheme. An SME can claim a higher rate of relief than is available to larger companies through RDEC. Additionally, SMEs can claim cash payments when they have no tax liability to reduce. The data shows that SMEs are cashing in on this value more than ever before; there was a 10% increase in first-time applicants in 2017-18 that was primarily driven by companies under the SME scheme.
Interestingly, there was also an increase in the number of SME claims under RDEC, which demonstrates that more companies are beginning to understand and capitalise on the breadth of UK R&D credits. Although the RDEC scheme was designed for large companies, those large companies often subcontract work to smaller companies, which can make an RDEC claim for that work. So far in 2018-19, SMEs and subcontractors have claimed a total of £265 million under the RDEC scheme. The UK tax law is complex so it is crucial to work with a specialist R&D tax adviser to fully maximise potential benefits.
Regardless of company size or age, some sectors continue to show extraordinary growth and investment in R&D. The data shows that the majority of R&D claims (and theoretically the majority of R&D investment) stem primarily from three industries:
- professional, scientific and technical
- information and communication.
These three sectors make up 71% of the total amount claimed for the 2018-19 financial year.
With these sectors comprising such a high percentage of claims, all companies in these categories with a presence in the UK should evaluate their potential eligibility for the R&D tax credits.
Get expert help
There are substantial opportunities available through the UK R&D tax credits. If your company is based in or has a presence in the UK and is performing R&D activities, you may be eligible for this credit. Moore Kingston Smith’s R&D experts can help you get the most out of the scheme.
Please contact us to find out more.