By how much do companies benefit?
Companies Benefits from R&D Tax Credit Scheme in UK
The latest figures published by HMRC in September 2017, shows that since the scheme was launched to 2015-16, over 170,000 claims have been made and almost £16.5 billion in tax relief has been claimed. From 1st April 2011, the rate at which qualifying R&D expenditure is treated for Corporation Tax purposes increased from 175% to 200%, on 1st April 2012 the rate increased again to 225%, and on 1st April 2015 the rate rose again to 230%. The ‘Manufacturing’, ‘Professional, Scientific and Technical’, and ‘Information and Communication’ sectors continued to have the greatest volume of claims, making up a total of 73% of claims and 75% of the total amount claimed for 2015-16. The Labour government should be congratulated for introducing R&D Tax Credits in 2000, and the Coalition government should be congratulated for recognising the importance of the R&D Tax Credit scheme in encouraging large and small companies to invest in R&D. The Dyson report on innovation recognised the importance and said this:
Of the various tax instruments available to government, R&D tax credits have the advantage that they seek to help companies that are themselves prepared to invest in R&D. Government does not need to choose sectors or companies, with the result that R&D can be encouraged in the widest possible range of sectors, taking advantage of businesses’ own insights into likely breakthroughs.
Given that the number of SMEs in the UK is estimated to be around 5 million, and the number claiming in the 2015-16 year is around 2865, it is clear that much less than 0.5% of SMEs actually claimed R&D tax credits in last year. Is this an accurate reflection of the R&D work actually done by SME? Around 39,000 different SMEs have claimed R&D Tax Credits since the scheme started in 2000 and 9,030 under the large company and Research and Development Expenditure Credit (RDEC) schemes, which launched in 2002-03 and 2013-14 respectively. This begs the question “Have a lot of SMEs stopped doing R&D or have many just stopped claiming R&D Tax Credits on the R&D they do”.
At the current rates, an SME with £100k of qualifying R&D expenditure would be able to reduce their Corporation Tax bill by £26,000, or if they were loss making they could receive a credit in cash of up to £33,350. These sums can make a significant impact on R&D budgets. Effective R&D can make a massive impact on corporate success and the bottom line. One client explained to me that his company would need to generate sales of about £1m in order to have the same bottom line impact that his first R&D tax credit payment of £54,000 had made. Think about that.