R&D tax credit scheme changes see 22% hike in SME claims

SMEs are starting to make greater use of R&D tax credits, with the latest statistics showing a 22% increase in the number of claims in the past year, which HMRC says reflects changes made to the SME scheme from April 2012 onwards

The latest statistics are for 2015-16, when the total number of claims for R&D tax credits rose to 26,255, an increase of 19% from 2014-15.

HMRC says this increase was primarily driven by a rise in the number of SME claims, which totalled 21,865 in 2015-16, up from 17,875 in 2014-15. In comparison, the total number of claims for the large company and the research and development expenditure credits (RDEC) schemes increased by 5% to 4,385.

The removal of the requirement for a minimum R&D expenditure of £10,000 has meant that more companies are eligible to apply for the relief. There have also been increases in the SME enhanced expenditure rate, including a rise from 125% to 130% in 2015-16. These changes, together with an increase in the SME payable tax credit rate from 11% in 2012-13 to 14.5% in 2014-15, have made the scheme more attractive, HMRC says.

However, although the volume of claims under the SME scheme is much larger than under the large company and the RDEC scheme, a greater proportion of the relief by value is claimed by large companies. This is because the amounts they claim are generally much larger than those claimed by SMEs.

The total amount of R&D support claimed rose to almost £2.9bn in 2015-16, an increase of £470m (20%) from the previous year. The cost of support for the SME scheme rose to £1.3bn, reflecting the increase in the number of claims and the rise in the enhanced expenditure rate to 130% in 2015-16.

The total amount of support claimed by large companies has also increased, as companies have moved from the large company scheme to the RDEC scheme which has a higher rate of support. RDEC support to large companies rose by 17% from 2014-15 to 2015-16, reflecting the higher number of claims and the increase in the RDEC rate from 10% to 11%. RDEC has now replaced the large company scheme with effect from 1 April 2016.

There was a particularly large increase between 2013-14 and 2014-15, with the cost of support rising by 47% year-on-year. HMRC says this can be largely explained by the increase in R&D expenditure being used to claim tax credits, particularly under the RDEC scheme, as well as the increase in the SME payable tax credit rate from 11% to 14.5%.

The total value of R&D expenditure against which claims were made was £22.9bn in 2015-16, an increase of 4% from the previous year. The majority of this expenditure (80%) was by companies claiming under the large company or RDEC schemes. SME expenditure made up only 20% of the total but showed strong growth year-on-year.

HMRC’s data shows that R&D claims and the amount claimed is concentrated in companies with a registered office in London, the South East or the East of England (46% of all claims and 62% of the total amount claimed). However, it points out the regional split is based on the registered head office location so may not be where all of the R&D activity takes place.

Manufacturing, professional, scientific and technical’, and information and communication sectors continued to have the greatest volume of claims, making up a total of 73% of claims and 75% of the total amount claimed for 2015-16.

Overall, between 2000-01, when the R&D tax credit schemes were launched, and 2015-16, over 170,000 claims have been made and £16.5bn in tax relief claimed.

Colin Smyth, tax partner at RSM said: ‘The increase in the number of claims and the level of support given to companies undertaking eligible R&D is impressive. This reflects a continuing growth in the awareness of these important tax reliefs as well as the positive impact of two changes made by the government to improve the credits available for SMEs and large companies in 2015-2016.

‘Claims have continued to increase in every area of the UK and the number of first time applicants has again increased dramatically. Companies who have not yet considered R&D tax credits should review their position now, as they may not be taking advantage of the tax reliefs that they are entitled to and this is potentially putting them at a competitive disadvantage.

Separate HMRC statistics show a doubling in the uptake of patent box relief.  In 2014-15, 1,135 companies claimed relief with a total value of £651.9m This has increased from 828 companies and £365.5m relief in 2013-14 as the relief is phased in.

Just over a quarter of the companies (305 or 26.9% of total) were classified as ‘large’ and together they claimed £616.6m of relief under the patent box (94.6% of the total).

The value of relief claimed under the patent box varies widely across UK regions. Companies in London claimed the most (£363.1m or 55.7% of the total) while companies in Northern Ireland claimed the least (£4.3m or 0.7% of the total).

Research and Development Tax Credits Statistics September 2017 are here.

September 2017 Statistics on uptake of the Patent Box are here.

Report by Pat Sweet

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