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R&D tax credit figures

Good news for UK Innovation

Caroline Hunt, Director, Corporate Tax and Stuart Weekes, Partner, Corporate Tax
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Caroline Hunt and Stuart Weekes of Crowe analyse the recent research and development statistics, which indicate a positive outlook for business innovation in the UK.

Research and Development (R&D) statistics recently published by HMRC show that there continues to be a year-on-year increase in the number of UK companies claiming R&D tax benefits. The latest figures are good news for UK innovation and indicate that more companies are investing in technologies to improve business performance.

R&D tax benefits were introduced for small and medium-sized enterprises (SMEs) in 2000, and extended to 'large companies' from 2002. By claiming R&D relief, a company will either reduce its liability to corporation tax or be able to claim cash from HMRC, either in the form of R&D tax credits or repayable R&D expenditure credits. This applies to loss-making companies also.

Current Trends

HMRC’s statistics look at the impact of R&D claims made in tax returns received up to 31 March 2019. The figures reveal that, until this date, the UK Exchequer paid out 4.3 billion pounds ($5.5 billion) in R&D cash to support companies. This compares favourably to the 3.5 billion pounds paid out in the previous year.

The HMRC statistics also show a slight shift in the sectors claiming R&D tax benefits. Claims made by companies in the construction industry increased by 44%, despite only accounting for 4.3% of all claims made in the last year. Encouragingly, the construction industry also produced an increase of 56% in the amount of expenditure the sector invested in R&D. This demonstrates that companies across different sectors and industries are seeing the benefits for their business performance of investing in innovation.

One note of caution in looking at the statistics for the total number of claims made by companies during this period is that they do not necessarily give the whole picture. This is because R&D claims can be made up to two years after the end of the accounting period. In other words, the statistics for the number of claims made in tax returns received in the period to 31 March 2017 are final at 52,000 and show a 20% increase compared to the number of claims made in tax returns received in the period to 31 March 2016.

So far, there have been 49,000 R&D claims made in tax returns received in the period to 31 March 2018, and it is encouraging to note that the number of first time claimants has increased by 13%. The total number of claims is expected to rise way beyond 52,000 by the end of the two-year filing deadline of 31 March 2020.

The increasing trend is mainly attributed to campaigns that have raised awareness of the benefits of making an R&D claim. It is also due to the general acceptance that claims can be made by companies of any size, in any sector, whether tax paying or not, provided the claim relates to R&D that meets HMRC’s strict R&D definition.

One unfortunate by-product of the upward trend was that, earlier in the year, there was a significant increase in the time taken by HMRC to process R&D cash repayments. This was mainly due to the increasing number of claims being made outstripping the slower rise in the number of specialists available to process them. This caused some disquiet among those R&D advisers and companies submitting R&D claims during this period, with some SME R&D claims taking around three months to be processed, and some 'large company' R&D claims more than six months.

In recognition of this, HMRC drafted in 200 additional staff to help clear the backlog and the processing time is now back to HMRC’s 28-day target. However, if the increase in number of claimants continues to rise, HMRC will need to think again about how it will continue to meet its processing targets.

While it is encouraging to see evidence that an increasing number of companies are making R&D claims, this still only represents around 1% of active companies registered with Companies House. The fact is that there are many more innovative companies in the UK that are not taking up this opportunity.

Whether the generally low uptake relates to a lack of understanding of the relief, or there are concerns over whether business activities qualify, specialist advice is recommended to help determine those eligible businesses and projects which stand to gain significant repayments for investment.

Impact of Brexit on R&D Tax Credits

Despite the ongoing uncertainty surrounding Brexit, and its impact on business planning, the good news is that HMRC statistics show that more businesses are willing to invest and focus on growth. In the long term, this should help the UK economy to thrive and to create a flourishing business environment which should attract further outside investment.

Currently, some companies that are SMEs, based on their size, still fall within the less generous 'large company' R&D scheme, because they have received notified state aided grants in the form of EU funding. If, following Brexit, the UK is outside of the EU, it may be possible for these companies to remain within the SME scheme if the UK government seeks to change the definition of an SME to one that is not tied to the EU legislation.

One note of caution worth mentioning is that innovative businesses relying on EU funding to finance their R&D may find it more difficult to access external funding and could end up losing out.

Planning Points

So, amid the continuing uncertainty surrounding Brexit, there is now a real opportunity to review the R&D tax incentives available to business—helping to make the U.K. the number one place of choice for innovative businesses. While this would undoubtedly cost the Exchequer more in tax benefits, it should also increase the tax receipts for the government from increased taxable profits and increased employee opportunities.

This was first published in Bloomberg Tax in December 2019.

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Stuart Weekes
Stuart Weekes
Partner, Corporate Tax
Thames Valley