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R&D Tax Credit Report: SMEs Drive Surge in Claims

HMRC has reported a jaw-dropping jump in the number of SME R&D Tax Credit claims. But what does this mean for innovation in the age of Coronavirus? 

2020’s HMRC R&D Tax Credit report is a smorgasbord of sumptuous data. 

This year’s figures revealed a staggering 19% surge in SME claims for the 17/18 financial year, with 9,000 more small and medium businesses filing for relief. 

Claim volume soared 17% to 62,095, with HMRC paying out £5.1 billion in tax breaks and cash credits. This is the largest sum on record, and 15% higher than the previous year. 

HMRC also posted partial numbers for the 18/19 financial year. With £5.3 billion already distributed, next year is shaping up to be the most prolific in the scheme’s history. 

As expected, the Manufacturing; Professional, Scientific and Technical; and Information and Communication sectors dominated the scheme, claiming 71p of every pound delivered. 

Speaking of domination, the South East one again took the lion’s share of regional funding.

29% of relief went to London and 19% went to the surrounding counties. These percentages reflect registered office location, though. Which means there might be a slight skew towards the nation’s capital.  

Clearly, these numbers tell a gratifying story. But what do they mean in the context of the COVID-19 pandemic? 

Pandemic points more businesses to R&D Tax Credits

First-time claimants jumped 10% to 15,750. This is a startling increase which suggests more and more businesses are using R&D Tax Relief to fill financial holes left by the pandemic. 

Consultancy firm McKinsey found that COVID-19 had damaged revenues for an astonishing 80% of British SMEs

For thousands of struggling businesses, R&D Tax Credits presents a large and accessible source of cash funding that can help to offset lost revenue.

Indeed, R&D Tax Credits are most generous for loss-making companies. They can claim 33% of their eligible costs back, instead of the regular 24.7%. 

And there are many reasons why now is the perfect time for businesses to extend their cash runways with R&D Tax Credits. 

Increased claim sizes a heartening sign

Another pleasing statistic: The average SME claim size rose 2.5% to £51,000. 

And the overall level of R&D expenditure used to claim tax relief was £36.5bn in 2017-18, an 8% increase year-on-year. 

These figures suggest two things: Investment in R&D is rising. And companies are gaining a deeper understanding of what they can claim for. 

For anyone who believes in the power of innovation to solve problems and create prosperity, these are encouraging signs. 

According to government data, every £1 of relief distributed generates up to £2.35 in additional investment. This means more staff hires, equipment purchases, and the kicking-off of new projects.

I’m proud of the role GrantTree has played in helping companies access this funding lifeline. 

We work hard to educate businesses, and to publish helpful resources like our Ultimate Guide to Claiming R&D Tax Credits – the most complete resource you’ll find online. 

Pandemic’s impact on innovation unclear

HMRC’s data reflects investments that took place between one and two years ago. 

That’s because R&D Tax Relief is awarded retrospectively. 

Companies claim for development work they undertook in the previous tax year. Though businesses can claim R&D Tax Credits up to 24 months after their R&D took place. 

So, while HMRC’s annual reports are good indicators of the scheme’s present popularity, they tell us nothing about immediate shifts in R&D spending. Or whether COVID-19 is curbing innovative research. 

Yes, each pound of R&D Tax Relief generates more than £2 of extra expenditure. But that is under ‘normal’ economic conditions.

The government has attempted to give companies extra support, and incentive to invest, through schemes like the Future Fund and Bounce Back Loans.

But will businesses prioritise R&D in the age of Coronavirus? Or will they use their larger payouts to offset lost revenue and cover essential expenses? 

This report will let us know a couple of years from now. 

Conclusion

I have mixed feelings about 2020’s R&D Tax Credit report. 

On the one hand, the scheme’s key metrics – claim volume, average payout, and so on – all moved in the right direction. 

Under normal circumstances, I would be quite bullish about what these figures meant for the UK economy and the state of technical research. 

But these are not normal circumstances. These are worrying times for SMEs. And for British R&D in general.

Has the government done enough to inoculate British innovation against the scourge of COVID-19? 

We’ll have to wait and see.

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