R&D Tax Credits: HMRC Reports Surge in Claims (2018)

HMRC’s latest report on the R&D Tax Credit scheme shows significant increases in claims and payouts.

UK innovation is full steam ahead. Though maybe that should be full ‘renewables-fuelled electric engine’ ahead…

HMRC’s annual report on its R&D Tax Credits scheme has recorded major increases in the awarding of tax relief and cash payouts to UK businesses. There was a staggering 25% growth in the number of tax credits claimed – £700 million extra in payouts – while the total number of claims made surged to more than 43,000.

Released today, the report is great news for the UK tech space. Entrepreneurs are clearly benefiting from the popular government scheme, utilising this much-needed cash injection to transform their ideas into technological breakthroughs and disruptive products.

All this is leading to more R&D. The report shows the total amount of R&D claimed against, a reliable barometer for innovation investment in the UK, rocketed up 16%; a clear sign of the health and ambition of UK tech, and the success of the government’s scheme.

By fuelling more innovation, and encouraging a bolder approach to research and development, the ballooning uptake of R&D Tax Credits is a welcome boon for the UK economy as a whole.

Here’s a look at the report’s key findings:

'15-'16 '14-'15 Change
Tax Credits Claimed
£3.7 billion
£3 billion
Total Claims Made
SME Claims
RDEC Claims
R&D Claims Against
£28.9 billion
£24.8 billion

Note, this data relates to the 2015-16 tax year. Data for the 2016-17 tax year is still being compiled by HMRC.

What’s behind the growth?

There are two main drivers for the surge in Tax Credit claims and payouts: more innovation and better payouts.

1.More Innovation

Innovation in the UK continues to ramp up. HMRC’s Tax Credits report cites the ONS’ annual Business Enterprise Research and Development (BERD) survey, which polls 6,000 businesses across the UK about their expenditure and behaviour.

The latest survey estimates that R&D expenditure nationwide is £21 billion, a billion-pound increase over the previous year. Tax credit support and the uptick in UK innovation are closely connected. UK companies can afford to continue developing new technologies and solutions while cushioning their outgoings by recouping some of their investment costs.

2. Better Payouts

HMRC has recently made a number of significant improvements to the R&D Tax Credit scheme, making more companies eligible for a greater level of relief. It made three key changes:

  1. Removing a rule stipulating that R&D expenditure had to cost a minimum of £10K to qualify for tax relief
  2. Increasing the enhanced expenditure rate for the SME R&D Tax Relief scheme from 125% to 130% from in the 2016 tax year
  3. Increasing the payable credit rate from 11% to 14.5% in the 2014 tax year.

Businesses are smartly taking advantage of these more generous parameters, and using the extra cash to hire staff, buy new equipment, and reinvest in even more R&D. However, founders still don’t think their businesses qualify for tax support. Even companies that aren’t cash generative or haven’t produced a working prototype could eligible for R&D Tax Credits.

Take GrantTree’s R&D Eligibility Quiz to find out if your company is qualified for support.

Digging Deeper

SME vs RDEC – Large Companies Take a Greater Share

Once again payouts to large companies edged those received by SMEs. R&D expenditure is generally much greater than that of smaller companies, meaning they’re entitled to much larger one-off tax breaks. SMEs are still holding their own, though. They filed 36,820 claims in the 2016 tax year – many more than their larger counterparts – receiving £1.8 billion in financial support.

Large companies and SMEs claim R&D Tax Credits through two separate schemes. Large companies claim through RDEC, while smaller companies through the far more generous SME R&D Tax Relief scheme. However, under certain specific conditions, SMEs receive relief through the RDEC scheme.

You can learn more about correctly classifying your company and applying for the right scheme here.

Location, location, location – The South East Still Dominates

Unsurprisingly, London and the wider South East continue to receive the lion’s share of R&D tax relief. The report shows that the region took in 48% of the total payouts, with most of that raked in by London. However, this data refers only to where companys’ registered offices are based. It doesn’t account for where the money is actually spent, or where businesses are actually doing the innovating.

Industrial Breakdown – Locked Up by the Usual Suspects

Once again, a trifecta of super-sectors is dominating HMRC’s tax credit distributions. The Manufacturing, Information & Communication, and Professional Scientific and Technical industry classes are each taking an unsurprisingly large slice of the pie, owing to their R&D-intensive nature and economic might.

Why some companies are still missing out?

While these figures are welcome news all round, it’s important to note that a lot of companies are still leaving readily available cash on the table. Cash they could be using to accelerate growth. Some companies aren’t claiming the full amount that they’re entitled to, while some aren’t claiming at all.

Applying for R&D Tax Credits can be a confusing and convoluted business (it’s still a government programme, after all). Working with an expert can improve your chances of making a successful tax credit claim. It also greatly increases the amount of tax relief you receive, which you can reinvest in whatever your company needs.

If you have any questions about R&D Tax Credits or would like to speak to one of our experts about making a claim, please don’t hesitate to get in touch.