UK businesses continue to enjoy increased levels of R&D tax relief – but is a storm brewing?

The annual release of HMRC statistics on research and development (R&D) tax relief has again revealed themes that have been consistently reported in previous years. 85,900 claims were made in the year to March 2020, representing a 16 per cent increase from the previous year. By far the larger proportion of these were made under the small and medium sized business (SME) regime (76,225). 

Total support delivered to businesses in this reporting period was £7.4bn, a rise of 19 per cent on the previous year, claimed on £47.5bn of eligible expenditure – again an increase on last year (15 per cent). 

The latest statistics show a concentration among companies headquartered in London, the South East and the North West. The manufacturing and information and communication sectors each made 22 per cent of the total number of claims and, together with the professional, scientific and technical sector, took up 69 per cent of the benefit of R&D tax relief claims by value. 

Commenting on the figures, James Tetley, partner and national Head of Innovation Reliefs at RSM UK said: ‘Whilst it’s positive to see all these statistics reflecting increased benefit being delivered to UK businesses, in many ways they are also a relic of a pre-pandemic age, covering the period leading immediately up to the first UK lockdown, and the ensuing period where coronavirus took hold in the UK. 

‘In the more recent period, we are acutely aware that businesses have faced increasing headwinds and there are a number of technical changes that may mean that claims and, in turn, R&D investment more broadly decreases, meaning these annual statistics over the next few years may not show that continuing positive story.

‘The first and most concerning change is HMRC’s intention to apply a dramatically different interpretation of the definition of subsidised or subcontracted R&D, which, although potentially subject to challenge, could have the effect of substantially restricting many businesses’ claims for relief under the SME scheme. This approach would seem at odds with the previous known policy intention of the R&D schemes, being to encourage continued investment in innovation and demonstrate ‘additionality’, which is increased spend on R&D activity as a direct result of the availability of these reliefs. 

‘There is also significantly more compliance activity from HMRC, in the form of enquiries, and indeed more cases being heard at the First-tier Tribunal. Three more decisions have recently been released, involving areas such as the definition of a venture capital company, the compliance process around R&D submissions, and the level of acceptable disclosure when making claims.

‘We are supportive of such activity, to the extent that it reduces the volume of inappropriate claims being made, but the inevitable by-product will be that genuine claimants must also devote more time to dealing with enquiries which in some cases, can run for many months. We hope that HMRC will maintain its continued support of the R&D regime, which we strongly believe is a much needed and valued incentive used by businesses that innovate across the UK’.