The latest HMRC R&D tax credit provisional statistics published in September present some interesting findings. HMRC acknowledged this year that the way in which the statistics were previously recorded wasn’t completely accurate, and have consequently revised statistics as far back as 2014-15. We explore the impact of these revisions below.
SME tax credit successes and opportunities
Statistics revealed last week show that HMRC had underestimated the success of the scheme for SMEs in previous years. Since revising these figures, they show a far more positive picture on the success of HMRC R&D tax credits, and this upward trend is expected to continue.
For example, revised figures for the financial year (FY) 2014-15 show there were in fact 29,840 claims; a 66% increase on the 17,875 claims originally reported before data was revised.
Similarly, for the FY2015-16, the original figures released showed the number of claims for the SME scheme as 21,865, while the revised figure is now a much healthier 36,820, showing an increase of 68%.
The trend for 2016-17 is that currently 34,060 companies have submitted claims under the SME scheme, but this data only represents claims submitted before 30th June 2018. So, there’s 18 months remaining for businesses to submit their claims for 2016-17, making the outlook for continued growth very promising.
MPA Group Business Insights Manager, Sarah German, commented:
Whilst we await the revisions for the HMRC partial data released for 2016/2017, the big story is not just the continued growth in the uptake of the R&D tax relief scheme, but the scale of the revisions for the previous years that show an additional 27,000 companies claimed tax credits between 2014-2016.Sarah German, Business Insights Manager, MPA Group
Sarah continued: “Much of the 2017 data served to continue trends stated in last year’s statistics in that the majority of claims (85%) were submitted by SMEs. The majority of the value (60%) and volume (45%) of claims came from firms with a registered office in London and the South East and the “Manufacturing”, “Professional, Scientific & Technical” and “Information and Communication” sectors made up 75% of the total claimed in 2016/17. This suggests potential opportunity or under claiming from other UK regions and sectors.”
We have seen impressive growth in claim value in “Transport & Storage”, “Mining & Quarrying” and “Arts, Entertainment & Recreation” industries which have seen a 42%, 29% and 25% increase respectively. This indicates an increased investment in R&D across these sectors. This isn’t the case across the board, however, within the “Water, Sewage and Waste”, “Agriculture, Forestry, Fishing” and “Electricity, Gas, Steam and Air Conditioning” sectors HMRC report significant decreases in claim values, of 26%, 20% and 19% respectively. This indicates a lower investment in R&D in these areas over the past 2 years.
SMEs use tax credits to support innovation
The data shows that SMEs continue to support innovation by investing in R&D, with a substantial year-on-year increase in qualifying expenditure, a trend that is likely to continue according to the latest revised figures from HMRC. In 2014-15 the final investment figures recorded were £5.2 billion and this rises to £6.5 billion in 2015-16.
The total for year 2016-17 currently stands at £6.5 billion but with the deadline for submissions yet to pass, these figures will not be wholly reported for another year. However, early projections again indicate the R&D investment final figures are likely to show further substantial growth.
SMEs show their pioneering spirit with increasing claims
MPA Group’s own insight finds that many SMEs and professional service advisors perceive that innovation is the preserve of larger businesses. However, HMRC figures show SMEs are surging forward at pace in claiming their entitlement under R&D Tax Credit scheme.
The SME figure for 2016-17 already stands at £1.83 billion after just six months of the year, more than for the whole of 2015-16 where the total value of claims was £1.75 billion, and again a substantial increase over the previous year’s total of £1.32 billion.
The Research and Development Expenditure Credit (RDEC) scheme claim figures for large companies also reveal year-on-year increases for 2014-15, with a final figure of £1.34 billion against a part-year tally of £1.16 billion and the 2015-16 final total of £1.71 billion against an original total of £1.36 billion. With a backlog of claims to be processed for 2016-17, we are expecting the six month total of £1.44 billion to rise significantly.
Loss-making SMEs receive more cash
Awareness is growing that loss making companies can also take advantage of the scheme to inject much-needed cash into their business to support their future innovation and growth ambitions.
The latest stats help to dispel the myth that reporting a loss prevents a business from making an R&D tax credit claim. A loss-making SME can recoup up to 1/3 of its R&D expenditure via the scheme – a significant boost for any company, and in fact a higher proportion of R&D expenditure than a profit-making business could claim for! A successful claim can release a cash injection into your business after your accounting year ends, allowing you to continue with the investment that’s vital to facilitate growth.Mike Price, Director, MPA Group
The most common way for SMEs to claim R&D tax credits is via a deduction from Corporation Tax (CT) liability; 18,230 claims have been made this way so far for 2016-17, compared to 6,810 claims made for a payable credit.
Payable credits are claimed by loss-making companies that have no CT liability against which to set the deduction. The rate for payable tax credit claims increased to 14.5% of enhanced expenditure in 2014-15. This is likely to be one of the drivers behind the continuing strong growth in the number of payable credit claims.
In some cases, an SME can first use its R&D tax credit to reduce its tax bill to zero, and then take the rest as a cash payment.
In other cases, an SME with no tax bill might choose to take some or none of its R&D tax credit as a cash injection, with the remainder being carried forward. All such cases are referred to as “combination claims”. There have been 9,020 combination claims made to date for 2016-17.
So far, HMRC has paid a record £1,165,000,000 to companies that are not liable to pay Corporation Tax for 2016-17. If you are a loss-making company, it is not too late to submit a claim for 2015-16 and 2016-17, so talk to us to see if you are eligible for R&D tax credits.