2018 has seen a definite uplift in SMEs applying for Research and Development tax credits. R&D claims do not only apply to technology and research focused companies, such as the large pharmaceuticals companies, in fact, any business which is innovative could qualify.
What are R&D tax credits and who can apply?
What are the immediate benefits of an R&D Tax Relief claim to Small or medium-sized enterprise (SME)?
• You can save 130% of your qualifying costs from your yearly profit, as well as the regular 100% deduction, achieving a total deduction of 230%
• If your company is operating at a loss, a tax credit worth up to 14.5% of the loss is available to you
You are eligible for R&D tax credits if, as a company:
• You employ up to a maximum of 500 staff
• Have an annual turnover less than EUR 100m or a running profit total under EUR 86m.
However, if your company has external investors, this can affect your SME status. You may need to include the figures of any linked companies in the calculations to determine if you come under the definition of SME.
You cannot submit a claim if the R&D project you are working on is already benefitting from an official government aid of another kind or your project has been subcontracted to you by a different enterprise, and you are simply carrying out the project on their behalf. In this case, the contracting company would be eligible to apply for the claim. However, you may be able to claim the R&D Expenditure Credit (RDEC). (Resource www.gov.uk)
Are SMEs’ R&D tax claims increasing in numbers?
Though HMRC is revising the data for the two previous years, we are finally able to see a huge leap in the number of claims made between 2013-14 (15,585) and 2016-17 (34,060). The number of SMEs applying for R&D tax credits has in fact doubled. This shows that awareness of the availability of these incentives has risen, resulting in more and more SMEs benefiting from R&D tax credits than ever before. This is great news for all involved, but especially for the economy, especially in these uncertain times, where the shadow of Brexit is making a lot of businesses very nervous about the future.
A massive £3.5 billion worth of R&D tax credits was claimed by UK businesses during 2016-17, not only that but this £3.5 billion could go on to stimulate up to £8.2 billion of additional investment in R&D. (Source HMRC)
Though the figures supplied by HMRC for 2016-2017 are incomplete, you can see from the infographic that since 2001 there has been a pronounced increase in SMEs applying for these tax credits:
Key findings from HMRC on the rise of R&D claims:
The number of claims submitted to HMRC in the last year has more than doubled.
For SMEs now the value of an individual claim for 2016-17 is showing as £53,876, with 75% of SMEs making a claim worth less than £50,000.
The average RDEC claim for 2016-17 is worth £272,881 which is a very substantial amount.
An incredible 5,900 RDEC claims were received by HMRC in 2016-17, which is a whopping 185% increase since the introduction of the scheme. R&D tax credits contribute £8.2 billion to the UK economy. (Source: HMRC/R&D tax credits)
Are R&D tax credits actually value for money for the government?
The government has passionately invested huge efforts in placing innovation at the core of its Industrial Strategy, as a solution to transform the UK economy and its productivity problems. But how does investing in R&D tax credits help?
In a recent paper, focused on R&D Tax Credits, HMRC reviewed the impact R&D tax credits made to the growth of UK businesses under the scheme. They estimate that every £1 they awarded to innovative businesses via R&D tax credits, stimulated between £1.53 and £2.35 in R&D expenditure.
Total tax receipts for 2016-17 were £575 billion. This means the £3.5 billion spent by the government on R&D tax credits is equivalent to just 0.6% of the total amount of money collected by HMRC. If you look at those figures, they represent good value for money for the government, especially considering how much R&D tax credits are worth in terms of additional R&D expenditure which sits at £8.2 billion.
With the current increasing trend of more SMEs claims, and the average claim value increasing slowly, there are still a lot of businesses still making conservatively low-value claims. As mentioned above, 75% of SMEs made a claim for less than £50,000. This is because the value of their claim represents how much they have actually invested in their R&D. Smaller companies tend to focus on employee growth, thinking they have not enough resources to commit to broader innovation in the early stages of their business.
What can SMEs do to achieve growth within the R&D Tax Credit scheme?
All enterprises should take a proactive approach and review their claim each year to ensure its value is maximised and is representing an accurate picture of their business investment in R&D. Once a business develops in size, continues to evolve financially, its R&D claim should regularly change in value too.
Since RDEC was introduced for 2013-2014, the average RDEC amount claimed has also increased steadily. HMRC also reports that the average claim size has decreased to £272,881 (down 12%). One can expect that to change too when the 2016-17 revised data is published, so the decrease could be in fact more significant.
What about large companies?
RDEC replaced the old incentive for large companies, the idea being to specifically target larger businesses; however, it has become a great tool for SMEs too. SMEs are generally unable to claim SME R&D tax credits if their R&D project is already receiving a grant, or the project is subcontracted to them – but there is an increased awareness that they can actually claim RDEC for this kind of expenditure instead.
Since the introduction of the scheme, the number of SME RDEC claims is now 3,300 which is more than 3 times what it was. SME RDEC claims generate a very close average claim value to the SME R&D tax credit claims (£51,515 under RDEC versus £53,876 under SME R&D tax credit).
RDEC proved to be a very popular incentive when it was introduced; in its first year alone more than 2,000 companies applied for the scheme. 2016-17 is the first year of published data since the previous large-company incentive was abolished, and it already shows that 5,900 RDEC claims were made for this period. That’s a massive 185% increase compared to its first year, showing that, by making a major change to the relief-mechanism for large-workforce resulted in high-turnover companies inspiring others to make a claim.
R&D tax credits awareness is growing
There has been a need for awareness-raising initiatives to help more innovative businesses access the R&D tax incentives. HMRC’s has released R&D tax credit statistics for 2018, which show that improvements have been achieved.
Revised 2014-15 and 2015-16 figures also show an increased number of SMEs that are claiming R&D tax credits than was forecasted. The revised totals show a huge £1.3 billion in relief, which is estimated to have stimulated a further £3.1 billion in additional R&D investment. HMRC has been working hard to ensure an increase in innovative businesses accessing the tax relief they are due, and inspiring others to do the same.
Can your business afford not to make a R&D claim?
Businesses grow an evolve and it’s important to continually assess your business’ current R&D claim and adjust it to the growth of your business, year on.
Though there has been a marked an increase in companies making a claim, this trend is not fast enough to resolve some key economic concerns.
The rise in claims has also brought an expected operational pressure on HMRC to efficiently and timely process and risk assess these claims, ensuring the right companies make claims, and receiving the adequate relief they need and deserve.
Hopefully, these figures can become a useful tool to help HMRC re-commit greater resources to operationally manage the R&D schemes, maintaining the momentum created, and providing crucial support to growing innovative UK businesses.
If you’re progressing the technological and scientific understanding of your industry, then it makes good sense to benefit from R&D and get the reduced tax bill that you’re entitled to.
So, either your business benefits from reduced tax or you receive a refund from HMRC, your business can definitely capitalise on the cash injection. A successful R&D claim can make all the difference to a developing business.
When enterprises see a new software or manufacturing development that would enable them to improve their product or service, they will often consider ways of introducing technical advancement of products into what they do in order to improve service quality. The good news is that if you’re doing that, you could qualify for R&D tax credits. In fact, a lot of sectors can benefit from R&D Tax credits, not just STEM companies, as long as the focus is in innovation.
UK businesses are some of the most innovative in the world when it comes to advancing their products, systems and services. However, only a few are fully aware of what they could claim when it comes to R&D tax credits. Naturally, most businesses develop new products and processes simply to meet the needs of clients and customers, but it’s worth celebrating the quality of innovation, especially in the manufacturing sector, and receive the financial support to steadily grow and promote innovation as well as the quality of products and services.