Reports: SMEs lead the way on UK innovation
- R&D Tax Credits
- Innovation
- 10 Min Read
Every year HMRC releases in-depth statistics about their Research and Development Tax Credit and Patent Box schemes, the latest of which were published yesterday.
These reports give a good insight into the effectiveness of these tax incentives in stimulating innovation, and, crucially, which sectors, regions, and company sizes are driving research and development in the UK.
As a reminder, the R&D tax credit, or tax relief, scheme has two routes; SME, which is designed to benefit small-medium-sized enterprises undertaking research and development work, and RDEC, which replaced the large company scheme some time ago. The two have different relief rates, and while SMEs can claim through RDEC in some circumstances, large companies can’t claim through the SME scheme.
Patent Box enables businesses to pay a reduced Corporation Tax rate on profits from the sale of products or services containing a qualifying patented innovation. It’s still a much less used form of tax incentive than R&D relief, but companies of any size can benefit.
Let’s look at the uptake of these schemes for the most recent 2018 – 2019 period (compared against 2017 – 18 for year-on-year purposes).
R&D Tax Credits
What’s changed
The total number of claims received for R&D tax credits across 2018-19 was 74,205, against R&D expenditure of £41.4bn.
Year on year, this is a 19% increase in claims and a 13% increase in the value of expenditure being claimed against. An encouraging sign that shows increased awareness of the relief.
Small to medium-sized enterprises
SMEs accounted for 56% of the support claimed in 2018-19 (£3,505m) and for 87% of all claims.
For the first time SMEs made up more claims through RDEC than pure RDEC claims from large companies; there were 4,720 RDEC claims from SMEs (£325m), an 8% increase on the previous year.
Stuart Alman Head of Business Planning, MPAThe increase in SMEs claiming through RDEC is particularly interesting. SMEs can claim through RDEC when they’ve undertaken R&D funded by grants or subsidies, for example, or when they’ve been subcontracted R&D work from a larger company. At MPA we’ve seen a steady increase in business owners looking for advice on grant funding, so while we can’t say for certain if there’s a direct correlation, these statistics do potentially point to SME owners becoming smarter about how funding and tax relief incentives can and should work together.
New claims
There were 19,490 first-time applicants for R&D tax credits in 2018-19, an increase of 23% from the previous year. The number of first-time applications in the SME scheme increased 25%, from 14,030 in 2017-18 to 17,490 in 2018-19. There was also a 7% increase in first-time RDEC claims where previously the number had slowed.
Payable credit claims
The 2019 – 2020 period so far has seen strong growth in the number of payable credit claims, with 50% of SME claims anticipated to include a payable tax credit element.
Stuart Alman Head of Business Planning, MPAThe fact the schemes can create a cash payment for SMEs obviously makes them particularly attractive at a time when cashflow is a challenge for business owners.
If 50% of this years’ claims do end up having a cash element, it’ll be interesting to see where business owners reinvest – for example in talent, equipment, or further R&D.
Patent Box
According to 2018-19 figures, 1,405 companies claimed relief of £1,129m under Patent Box.
Though the number of companies claiming has grown by 8%, large companies are receiving 92% of the amount of relief claimed from just 28% of total claims.
The average claim for large companies is £2.6m while for SMEs it’s just £84k. Still, many more smaller businesses could likely be taking advantage of this scheme.
Stuart Alman Head of Business Planning, MPAYou can clearly see the opportunity for SMEs to benefit more from Patent Box from these statistics. We know it’s an underutilised relief, and while some of that is down to awareness it could also be because of a misconception about Patents themselves. For example, smaller elements of bigger innovations could be patented first, avoiding a perceived complicated and lengthy process. My advice here would be to speak to a Patent attorney and innovation tax specialist like MPA to understand all the benefits of protecting your IP this way.
Manufacturing dominates
Manufacturing dominates in terms of the number of claims being filed for both R&D tax credits and Patent Box. While this isn’t necessarily surprising since many companies who manufacture are inherently required to undertake research and development – in response to rapidly changing technology, practices, standards, customer requirements and competition – the value of the claims filed by this sector is.
For 2018-19, there were 17,055 claims from the manufacturing sector for R&D tax relief, for an average claim value of just £100,264. In comparison, the finance and insurance sector had an average claim value of £260,223 against just 1,345 claims.
The same goes for the construction, information and communication, and professional, scientific and technical sectors. Between them and including manufacturing they’re consistently in the top three of sectors claiming by volume, but not by claim value.
There are a number of factors at play here. For example, the manufacturing sector has a higher number of patents than many others included in the report, and the top three sectors by volume will include more small companies undertaking R&D but at a lower value.
Elsewhere, in some sectors - like construction for example - R&D can often be hidden, happening as a result of addressing constant challenges rather than as part of big innovation projects.
Some of this we can influence, though.
By showcasing what types of R&D are happening across all types of businesses and sectors we can break down the barriers to claiming. We know this works. We work with partners such as the Scaffolding Association to increase awareness in these under-claiming sectors and we are starting to see an uplift.
What does this mean?
We’ve seen uptake statistics take an upward trend for a number of years now, but this year the statistics around SMEs claiming through RDEC is even more encouraging.
While large companies undoubtedly play a big part in establishing the UK as a global innovation hub, a truly innovative economy comes when companies of all sizes understand the value of research and development and collaborating.
Your next steps
Claiming for tax relief can be complicated and time-intensive. Without the right knowledge of what you can claim against and a company-wide overview of activities being undertaken, it’s difficult to ensure the maximum amount of relief is being sought. On top of that, claims can be filed incorrectly, and we know many businesses are put off by the process alone.
That’s where we come in. We’ve helped over 2,000 businesses access R&D tax credits, and specialise in working with innovative UK companies to unlock funding for great work.
We have a quick estimate calculator to help you see what you might be eligible to claim, and have a team of expert advisors ready to guide you through the process to ensure you get maximum relief. Just leave your details below and we’ll get in touch.
