R&D tax reliefs are catching on fast: Who’s claiming?

R&D Tax Credits: The SME scheme

The SME scheme is a branch of R&D Tax Credit relief that’s used - as the name suggests - by small and medium-sized companies engaging in eligible R&D work. A 130% Corporation Tax super-deduction can be claimed, with a payable credit of 14.5% of surrendered losses for loss-making companies.

The idea behind the scheme is to encourage businesses to invest in R&D in the UK. By doing so, the wider economy benefits, not least through job creation and improved skills.

New to R&D Tax Credits and the different branches of the scheme? Find out more.

Recent changes

With the SME scheme rising fast in popularity over recent years, the number of claimants jumped from 52,200 in 2017 to 2018 to 74,100 in 2019 to 2020.

The payable credit rate has also been made more generous, with an increase from 11% to 14.5% in 2014. The enhancement rate then went up from 125% to 130% the following year to where it is today. It’s great news for companies, but with increased awareness of the scheme and a growth in eligible R&D expenditure, it’s pricey for HMRC. Claims are expected to increase, although potentially more slowly than previously due to the effects of the pandemic.

A breakdown of claims

There were 85,900 claims for R&D Tax Credits in 2019 to 2020, of which 76,225 were under the SME scheme, according to the latest HMRC statistics. Between 2019 to 2020 the level of R&D expenditure against which R&D tax relief was claimed was £47.5 billion, with 33% of this expenditure made by companies using the SME scheme.

First-time applicants for the scheme in 2018 to 2019 leapt by 25% too compared to the year before, standing at 17,495.

Which sectors have claimed most - and where?

HMRC statistics also break down claims by region, and it’s perhaps not surprising that London and the South East made the most claims between 2019 and 2020. They also had the biggest payouts.

During the same time period, the ‘Information and Communication’ sector made the most claims (in terms of both numbers of value), followed by ‘Manufacturing’ and ‘Professional, Scientific & Technical’ and ‘Manufacturing’.

R&D Tax Credits: The RDEC scheme

RDEC (research and development expenditure credit) is used mainly by larger companies, plus some smaller companies that have previously taken state aid. Like the SME scheme, it’s designed to encourage UK business investment in R&D which the economy will ultimately benefit from.

HMRC’s Evaluation of the RDEC report (2020) looked at how effective the RDEC scheme is. It’s actually very effective it seems, with findings showing that for every pound spent on RDEC, between £2.40 and £2.70 is reinvested by UK companies in R&D.

What’s changed over time?

Like the SME scheme, the cost of RDEC has increased particularly between 2016 and 2020. This is largely due to better awareness of the scheme, but also thanks to a jump in the RDEC rate from 11% to 12% in January 2018.

In 2017 to 2018 there were 8,100 claimants, rising to 9,400 in 2019 to 2020. Costs are expected to stay fairly stable throughout 2022, despite the RDEC rate rising from 12% to 13% in April 2020. This is due to the fact that for many companies R&D will have taken a back seat amidst COVID-19 economic uncertainty.

How are RDEC claims distributed?

HMRC’s Research and Development Tax Credits statistics (2021) show the grand total for all R&D Tax Credit claims stood at 85,900 in 2019 to 2020. Of this figure, 9,675 were made under the RDEC scheme.

The amount of expenditure made during the same time period was £47.5 billion, 67% of it made by companies using RDEC. There were also 2,000 first-time applications in 2018-19 using RDEC, up slightly from the year previously.

Which sectors are claiming RDEC and where?

HMRC’s Research and Development Tax Credits statistics (2021) also contain regional analysis for RDEC in the same way as for the SME branch. Again, it’s not surprising that London and the South East region accounts for the most (and highest value) claims. This may not be totally watertight though, as the R&D work itself may actually have taken place elsewhere. It’s a pretty good guide though.

In terms of sectors themselves, RDEC claims were highest and most valuable in the ‘Manufacturing’ sector, just in front of the ‘Professional, Scientific & Technical’ sector.

Patent Box

Patent Box relief is designed to incentivise companies to hold on to and commercialise existing patents and develop new products. This in turn helps to keep the UK as a world leader in patented technologies. Find out more about Patent Box relief.

In 2016, changes were made by the government to the Patent Box scheme to make it comply with new OECD rules for Intellectual Property regimes (called ‘Nexus’ changes). Up until July 2021, companies were still allowed to claim under the pre-2016 rules in certain circumstances. Find out more about these ‘grandfathering’ rules.

Who claimed most?

HMRC’s Patent Box statistics (September 2021) show that in 2018 to 2019, 1,405 companies claimed tax relief using the Patent Box scheme. The total amount claimed stands at £1.1 million.

28% of companies that made a claim were classed as ‘Large’, accounting for a substantial 92% of the relief claimed.

More than half of the companies claiming Patent Box relief were in manufacturing (this includes pharmaceuticals). This sector accounted for 32% of the total relief claimed. Following just behind was the ‘Professional, Scientific and Technical’ sector, accounting for 26%.

In terms of geography, 16% of all claims came from companies registered in London or the South East. They also claimed 48% of all relief. The North East has the lowest number of claims at just 2%. This starkly highlights the geographical discrepancies in R&D tax relief claims as a whole. The reason is perhaps down to many factors, including more science and tech companies being southern-based. It may also simply be due to a lack of awareness that such tax relief schemes exist.

We actually recently looked at this north-south divide for an article on our sister site, Tax Cloud. It’s well worth a read, here.

Speak to the R&D tax experts

Want to know more about any aspect of R&D tax relief? Our expert team will work out your eligibility and guide you through your claim, starting with a quick consultation.

Send us a message now or call 0207 118 6045 for professional, friendly advice.