Do R&D Tax Credits Represent Value For Money For The Government?
The simple answer is yes, by enlarge, we think they do. The R&D Tax Credit incentive scheme is as popular now as it has ever been with thousands of UK companies reaping the rewards. This has meant that not only does it continue to swell the government coffers through encouraging employment, but means that more and more UK companies are thousands of pounds better off when it comes to covering the cost of their innovative activities. Here we take a look at the statistics.
What are R&D Tax Credits exactly?
R&D Tax Credits are a tax break offered to companies by the UK government to incentivise innovation. They allow businesses to reclaim up to 33% of the expenditure they have incurred in the course of research and development (R&D) activities, even if the project ultimately failed.
In practice, SMEs (regardless of whether they are making a profit or not) can get back up to 33% of the amount they’ve spent on eligible innovation work. Larger companies can receive up to 10% of their R&D expenditure back. The relief is offered either as a partial Corporation Tax refund or as a tax-free lump sum. It can be used for anything, from purchasing equipment to paying salaries or taking on developers.
Unfortunately, despite the fact that this relief is not new (R&D Tax Credits first came about in the year 2000), many companies are still unaware that their R&D work is eligible. We’ve also found that many of the ones that do claim often aren't including enough costs in their application. In both cases, these companies can be missing out on a serious financial injection.
What are the recent trends in R&D Tax Credit claims?
Most companies applying for R&D Tax Credits come under the umbrella of the SME scheme. Broadly speaking, the number of SMEs making a claim has gone up, but many of these are of lower value - nearly 20% receive under £5,000 in fact. There is also an increasing number of SMEs who access the relief via the larger company (RDEC) scheme due to the fact they have benefitted from previous state-funded grants or subcontracted R&D. On average, SMEs falling into this category have enjoyed larger benefits.
For larger companies, the average benefit is just under £700,000, with 7% of such companies receiving just under half (43%) of all the money claimed. It’s worth noting however that - like last year - these figures are based on partial data. This in turn can limit data accuracy to indicative trends. Any R&D Tax Credit claims classed as “non-standard” - i.e ones which were not submitted via a CT600 - are not included.
One more thing to note…
The fact that a small proportion of large companies hoover up 43% of all the funding awarded by HMRC is not actually a bad thing. Large businesses naturally will have a higher cost base than the vast majority of SMEs, and R&D relief isn’t dished out from a fixed pot of money. It’s essential that all qualifying companies continue to submit a claim for their relevant R&D activities, and that the correct amount of relief is awarded to each one.
SMEs using RDEC
The RDEC branch of R&D Tax Credit was unveiled in 2013, and since then we’ve seen a steady increase in the number of SMEs using it. As we’ve already mentioned, we have found that this is mostly because grant-funded SMEs are prohibited by EU state aid law from claiming under the SME scheme. This has meant that a number of applicable SMEs are using the RDEC scheme as a workaround.
Despite the fact that the RDEC scheme is actually less generous than the SME one, these businesses are able to benefit from a larger claim value (of around £65,000 on average) compared to businesses using the SME scheme (£54,000 average claim).
There’s one small fly in the ointment though: As a whole, claim numbers are up, but the average claim value is down
There has been a flattening of average claim values recently and we think the main reason for this is due to an increasing number of claims for only small amounts of money. On average, nearly 80% of SME R&D Tax Credit claims are worth under £50,000 and surprisingly around 20% of all claims are worth under £5,000.
We have found however that this isn’t always reflected with the clients we have worked with. Undergoing any R&D activities is usually pretty expensive, and so the relatively high proportion of very small claims is quite a surprise. It’s difficult to believe that so many SMEs are paying out only £10,000 or less on R&D each year. So why has this happened?
It could be for a number of reasons but primarily it’s likely to be that SMEs are nervous about the application process for R&D Tax Credits and only want to ‘test it out’ by making a small claim. It could also be that they (wrongly) assume that small amounts are less likely to be scrutinised so heavily by HMRC or that there is less chance of an enquiry. This is why it’s so important to get accurate, professional advice when making an R&D tax relief claim as the process is notoriously convoluted and myths and inaccuracies are rife. Remember, all claims need to be of the highest quality, regardless of their size.
Where can I turn to for help and advice about R&D Tax Credit claims?
Claiming R&D Tax Credits involves a large amount of paperwork, and strict adherence to HMRC guidelines is paramount. As an expert team of R&D accountants and specialists, Myriad Associates can guide you through the process and make sure you claim for everything you’re entitled to. There’s also our Tax Cloud calculator for businesses which allows you to enter your own company’s figures for fast, accurate results.
To discuss anything further or ask us a question, simply get in touch on 0207 118 6045 or use our contact page for professional R&D tax advice right when you need it.
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