05Oct
HM Revenue and Customs (HMRC) recently unveiled its annual report on Research and Development (R&D) tax relief for the tax year 2021 to 2022. This report offers valuable insights into the landscape of R&D support in the United Kingdom, highlighting key trends, claims, and expenditures.
Here's a concise summary of the report's key findings:
1. Substantial Growth in R&D Tax Relief
In the tax year 2021 to 2022, the provisional estimated total of R&D tax relief support claimed reached £7.6 billion, signifying an 11% upswing from the previous year. This aligns with an 8% increase in total R&D expenditure, totaling £44.1 billion. This indicates a notable commitment to innovation and research within the UK.
However, it's important to monitor error and fraud statistics, given the increased number of HMRC enquiries. For the year 2020 to 2021, error and fraud were estimated at £1.13 billion, a significant rise from the previously published estimate of £336 million for the same period.
2. Expanding R&D Tax Credit Claims
The provisional estimated total number of R&D tax credit claims for the same period reached 90,315, marking a 5% rise from the previous year. This increase is attributed to both the Small or Medium-sized Enterprise (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme, indicating a broad expansion of R&D activities.
However, the focus remains on the compliance of these claims, particularly concerning their alignment with projects aimed at advancing science or technology. Given the high risk and error rate identified within the SME scheme, the reduction in R&D enhancement from 130% to 86% for expenditure incurred after 1st April 2023, is not surprising.
3. Enhanced Average Claim Values
The average value of R&D tax credit claims witnessed a 6% increase in the tax year 2021 to 2022, with a 9% increase observed in the SME scheme.
While post-COVID-19 recovery might explain part of this rise, there's also the possibility that it stems from non-compliant activities being included in claims, which could inflate their value. As 2021 to 2022 HMRC enquiries are resolved it is likely that overinflated claims will be largely reduced to reflect a more realistic picture of genuine R&D claim values.
4. Geographical Concentration
R&D claims are geographically concentrated, with companies headquartered in London (22%) and the South East (15%) contributing a significant share of the total amount claimed. It's worth noting that the location of registered offices may not always correspond with the actual sites of R&D activities.
The regional concentration aligns with expectations, considering the higher salaries prevalent in London and the South of England, which have historically been hubs of innovation.
5. Sectoral Dominance
The Information & Communication, Manufacturing, and Professional, Scientific & Technical sectors continue to dominate R&D tax credit claims. Together, these sectors account for a substantial 62% of total claims and an impressive 67% of the total amount claimed for the tax year 2021 to 2022.
These sectors have a strong track record of fostering innovation in the UK. Conversely, sectors such as care homes, pubs and restaurants, and retail have faced scrutiny and it is highly unlikely that these sectors entail qualifying R&D activities. The role of SIC codes in initially establishing the likelihood of R&D activities being undertaken is becoming more prevalent.
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Source: Research and Development Tax Credits Statistics: September 2023 - GOV.UK (www.gov.uk)
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