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Company investment in R&D is the driving force behind economic growth. It increases spending, boosts employment and keeps the country at the cutting edge of scientific and technological innovation.
The R&D Tax Credits scheme is a valuable tax incentive that allows companies to claim back a substantial portion of their R&D expenditure. The scheme itself is divided into two branches, and companies must claim under the most relevant one to them. The two branches are called the SME scheme, and the research and development expenditure credit (RDEC).
The two reports look at the effectiveness of both of these schemes. In terms of RDEC, it appears that between £2.4 and £2.7 is additionally invested in research and development by UK companies. This is similar to the Large Company scheme (RDEC’s predecessor), which gave rise to around £2.35 for every pound of tax relief, according to an evaluation carried out by HMRC in 2015.
The SME report also reviews the direct and indirect impacts of R&D Tax Credits for small and medium-sized enterprises. The evaluation of the SME scheme was shared with the European Commission in September 2019 as part of the government’s commitment to an independent evaluation for the state aid re-notification.
There are some key differences in the branches and which one a company falls under will determine how much they can claim.
Like with most things R&D tax relief, it’s not always cut and dried. You may also therefore find our article R&D Tax Credits: What's The Difference Between The SME Scheme And RDEC? useful.
R&D Tax Credits represent a valuable tax relief offered to all UK companies that have undertaken innovative research and development projects. These projects could centre round the creation of a brand new product, service or process for example, or the substantial upgrade of something that already exists. Food and beverage companies for instance might expand their product lines with new flavours or themes, or more sustainable packaging. Then of course there are drug research companies carrying out various medical research and field studies.
But don’t be fooled into thinking R&D Tax Credits are only for large pharmaceuticals or people in lab coats. In fact, research and development occurs in just about every single industry, and the relief can be claimed for the smallest of projects too.
There isn’t one (if you don’t count the tricky job of applying - we’ll come back to that later). Essentially, as long as a company has undergone scientific and/or technological research in the course of their project, and invested money in tackling a specific challenge where the outcome was uncertain, then R&D Tax Credits are likely to follow.
This is just a brief summary about what R&D Tax Credits are all about, so we strongly recommend reading our R&D Tax Credits page for more detail.
As mentioned, the purpose of the two reports was to evaluate how the two branches of the R&D Tax Credits scheme impact R&D expenditure. The evaluation suggests that the scheme indeed generates direct, indirect, and spill-over effects benefiting businesses that claim relief and the economy as a whole. For this reason, it satisfies its general and specific objectives.
However, the reports also show that in comparison to previous evaluations, the additionality ratio for the SME scheme (the extra R&D expenditure for every extra £1 of relief) has apparently fallen to between 0.60 and 1.28. Conversely, the evaluation of the RDEC scheme was carried-out pro-actively by HMRC. It suggests a greater additionality ratio (around 2.5) than the SME scheme, with the relief having generated up to £7.1 billion of additional R&D expenditure in 2017-18.
A similar report has also been published evaluating the Patent Box, with results suggesting a positive impact on business investment. Indeed there has been around a 10% increase in assets held in the UK by firms that use the Patent Box compared to similar firms that have not availed of Patent Box relief.
Regardless of whether a company claims under the SME scheme or RDEC, the whole point of R&D Tax Credits is that it’s open to all UK companies of all sizes and sectors. It’s a government incentive to invest in growth, in turn stimulating the economy (which is of course needed now more than ever).
The only catch to it is the application process. It’s tough.
Applying for R&D Tax Credits, whichever branch of the scheme you use, is a complex and rather laborious process. It’s not simply a case of filling in a few forms (if only!). Applicants instead have to not only submit scrupulously accurate figures – apportioning time and resource to R&D work only – but the onus is also on them to justify the work itself. This is done by completing a technical report that needs to explain in detail what the purpose of the project was and what scientific/technical challenges the work sought to overcome. HMRC also expects the report to be written to a specific format - and how are you supposed to know what specific expenditure is actually eligible anyway?
It’s incredibly easy to under-claim, missing out on vital extra cash, or over-claim, getting you in a serious mess with HMRC.
When you come to us to make your R&D Tax Credits claim, we will work with you at every stage to make sure your claim is complete, accurate and fully optimised. We’ll also work through your figures and compile your report for you, before submitting it to HMRC on your behalf. This way, you can rest assured that not only are you receiving every penny your company is entitled to, but that HMRC aren’t about to come knocking. After all, that’s the kind of stress everyone wants to avoid right now.
Call our friendly expert team of R&D tax relief and funding advisors on 0207 118 6045, or use our contact page so we can quickly get back to you.