R&D reliefs are among the most generous tax breaks for UK businesses
A significant rise in the number of research and development (R&D) tax credit claims among SME firms highlights how useful the credits can be for business development. But many older firms are not taking advantage of their potential.
R&D reliefs are among the most generous tax breaks for UK businesses. The latest figures from HMRC for 2016/17 show around a 20% increase in the total number of claims for R&D tax credits, worth over £4.3bn. The lift was largely driven by a rise of around 22% from SME claims. But with a government target of 2.4% investment in R&D by 2027, the new figures amount to just below 1.7% of GDP, against a European average of 2.07%.
The release of the data has heralded calls for an increase in awareness for businesses of the benefits of the credits and the need to stimulate R&D within the economy. With around 40% of claims coming from companies less than 10 years old, there still appears to be an assumption that the credits are mainly aimed at younger firms. With well-established businesses still innovating to maintain their competitive edge, they may be missing out on R&D finance.
Drilling down into the data reveals some interesting detail showing a regional difference on claims made based on registered offices, with the majority focused on London, the South East or East of England. Figures for Scotland showed a 16% rise, based on figures for 2017/18. However registered offices do not necessarily reflect the location where activity takes place, so the money may be more evenly distributed than it appears.
The increase in numbers has meant a backlog in the processing of claims, with some firms waiting for up to nine months. HMRC has expanded the team handling R&D credits from October, which should help clear some of the delays and ensure companies receive the relief when they need it.
One additional side-effect of the increase in claims is that HMRC has also announced that it is chasing R&D tax relief underpayments to the tune of £612m. This is tax that HMRC describes as ‘under consideration’, which could lead to unwelcome HMRC investigations. An additional sum of underpaid tax relating to patent box claims is also under scrutiny, where companies can pay tax at an effective 10% rate on patent related profits instead of the standard 19% corporation tax.
The overall message is two-fold. You may be missing out on relevant R&D tax reliefs and you don’t have to be a young or a start-up company to benefit. But you need to be clear what you are claiming for and how, or you could run the risk of an HMRC investigation. We can advise you of the best course of action.