We’ve had a bit of time now to digest the most recent R&D tax credit statistics for the 2023 – 20241 year. It’s time to break them down and work through the reasonings behind the figures, and also think about what the next steps could be considering the scale of volatility in recent years.
This period covers a range of changes to the R&D schemes including:
- The reduction in the SME enhanced deduction rate
- The reduction in the surrender rate meaning that the potential benefit of the SME scheme was greatly limited (although this was at least partly remedied with the introduction of the SME Intensive scheme)
- The RDEC rate was significantly increased compared to its previous position, which is reflected in the statistics for the period.
Overall, there are a few key headlines to take from these figures:
- The largest drop in claims was for those seeking <£15k tax relief, and there was an increase in the average value of claims sought
- The estimated amount of R&D tax relief support is down by 2% for the period
- There is a provisional decrease of 26% in the number of claims made for the period, although this is most prevalent in smaller quantum claims
- There is a 29% decrease in support for SME relief with a 36% increase in relief for RDEC claims
A look at the latest R&D figures
The main point that will immediately draw a reaction is that overall support has decreased. Whilst this is a relatively low level of decrease it marks the first time there has been a decrease in support provided since the data for 2020 – 2021. Again, this fall in overall support was to be expected given HMRC’s strategy of countering non-compliance and the reduction in SME support during the period.
This is further shown with overall support for SME claims falling by 29%, again due to a mix of the clampdown on non-compliance but mainly centred in the major reduction to the tangible benefit for SMEs. An increase of 36% in support for RDEC claims due to the increase in the benefit for the scheme helps to offset the overall drop in SME support.
Looking at these figures overall and without context makes it hard to draw any initial conclusions apart from the fact that the changes in benefit for both schemes is having an impact.
However, looking deeper at the volume and split of claims submitted some trends begin to emerge.
Overall, there is expected to be a decrease in the number of claims submitted across this period, with a 26% decrease in the number of claims submitted on the previous year. This decrease is most prominent in submissions for claims seeking <15k of tax relief which has led to the average claim value increasing by 33% compared to the previous year.
Does this mean that HMRC’s approach to non-compliance is working? It would typically be expected that claims of this scale likely would not meet the requirements of advancing an eligible field of science or technology.
Furthermore, have the more unscrupulous elements of the R&D advisory field been narrowed down and weeded out, given the level of scrutiny and investigative work?
Or, on the other hand, are genuinely eligible early stage start-up and spin-out SMEs who would also sometimes fall into this small claim value in their foundation years now scared of the system and the potential for enquiries or reputational damage? Whether HMRC has managed to eliminate non-compliance in the sector is a key point for the future of the R&D schemes in the UK.
The following periods figures I would expect will follow a remarkably similar route to those noted above. Likely further falling volumes of claims on the lower end of tax relief sought but also a potential further decrease on the level of tax relief provided as the New RDEC and ERIS2 claims begin to be included in these statistics with their restrictions on overseas spending and new interpretation of what contracted R&D is claimable. This has a two-fold impact as the schemes themselves become increasingly complex and therefore advisor’s fees are likely to reflect that.
HMRC’s approach to eliminating non-compliance has thus far been ruthless in terms of the effects of this being felt industry wide. Simply slashing the benefits of the schemes is extremely effective but it also has an impact on those that are genuine users of the schemes who rely on tax credits as an extra runway between funding rounds to support their growth. This blowback was seen with the introduction of the SME intensive allowance for the SME scheme in this period although this had a relatively low take up. Is it now time for both policy makers and HMRC to shift to a more positive mindset when considering R&D tax relief especially given the UK’s place in the global market as one that is an incredible incubator of some of the most impressive, impactful and up and coming technologies but as one that continually struggles with the scaling up to reach its full potential.
Looking forward to the Budget (and beyond)
As noted above, a common symptom of the UK technology market is not a lack of innovation (it’s the opposite of this). There simply isn’t enough concentrated capital funding to allow for companies to bridge the gap to becoming globally dominant firms situated here in the UK. Typically, the global market will view the UK as an incubator of brilliant technologies, taking much of the risk with limited upside potential as worldwide entities can swoop in and purchase the best of the UK3.
This bottleneck not only effects those approaching the larger Series B – D rounds of funding but also those in the much earlier seed stages where any sort of access to funding has continued to become increasingly difficult as budgets are tightened. This is the vital stage where the UK’s tax relief system can play a huge role with particular emphasis on R&D tax relief. Many innovative spin-outs and start-ups within the technology and science ecosystem will likely qualify for relief and this funding offers a fantastic way to provide equity and debt free income to those trying to bridge the gap between funding rounds.
However, recent changes to the scheme have made this harder as rates have decreased and, in some cases, genuinely innovative companies have had to deal with multiple yearlong enquiries. This raises the question: could R&D tax relief yet again be reformed to help to bridge this funding gap and to provide much greater support to UK innovation as we move towards trying to remedy this bottleneck with tools such as the Mansion House Accords?4
Whilst we have had a raft of changes over the last couple years, and more change might be the last thing on every advisor’s mind, is it now time for R&D tax relief to step into the role of providing ever increasing levels of support to help bridge this funding gap?
Looking abroad and to our closest neighbour in Ireland the big news recently has been about increases in support with its rate increasing to 35%, higher than the UK’s schemes have ever been. Does this mean that it is time for policy sentiment to switch to providing support to our most innovative companies through tax relief where private and institutional funding currently cannot? The big question is then how the UK could begin to address this issue with the help of R&D tax relief.
Firstly, the key point would be to increase the benefit of both schemes as they currently stand. The differentiation between intensive and non-intensive R&D is a fair distinction and is a very helpful method to ensure that those with the greatest focus on conducting R&D can claim the greatest benefit from this. This of course brings back the issue of non-compliance as the schemes become more lucrative again. However, one potential method to overcome this is to take a much stricter and defined definition on what fields of science and technology can qualify.
Alongside industry experts HMRC could set out a list of qualifying fields to inform potential claimants of their potential eligibility and for those unsure of where they lie, the advanced assurance mechanism could be utilised here as a first point of contact to determine whether a claimant could be eligible.
This would offer both HMRC and claimants a chance to immediately determine whether a claim could be eligible if they cannot quite determine whether they fit in the brackets of qualifying fields. The usage of R&D tax relief as a tool for growth has clear benefits but also the risk of non-compliance attempting to rear its head yet again. It is critical to the usage of the system that HMRC and the advisory industry engage in much more active regulation and control over the sector which is currently in its infancy with the introduction of agents being required to be registered with a professional body, although this in itself is not enough.
Of course, with the Government currently facing calls to increase taxes to meet spending shortfalls the ask of increasing spending on a scheme which in recent history has been more of a problem point than a source of growth is not a popular one. However, if the UK truly wants to embrace and fully reach the potential that we show in terms of innovation we need to consider how best to unlock extra sources of funding to achieve this growth and that will require difficult choices in the near future for the sake of long-term growth.
