Late last year HMRC circulated an in-depth collation of statistics analysing Research and Development (R&D) tax credit claims and Patent Box (PB) tax relief showing an upward trend in both the number and amount of R&D credits claimed.
The latest R&D tax relief evaluation reports – covering the R&D tax relief for SMEs and the Research & Development Expenditure Credit (RDEC) – suggest that both schemes generate positive direct and spill-over effects, such as an increase in regional R&D expenditure, which not only benefit businesses that claim R&D tax relief but the economy as a whole.
HMRC’s evaluation of the Patent Box also suggests that it has had a positive impact on the business investment.
R&D Tax Credit Evaluations
The SME scheme works by reducing a company’s corporation tax liability by deducting an additional amount calculated as 130% of R&D expenditure from its profits. This can reduce corporation tax liabilities and there is also the option of receiving a cash payment if the company is loss making.
There has been a surge in the number of businesses claiming SME relief and the amount of relief paid since 2012–13. However, the report suggests that the R&D expenditure per business has declined, suggesting a growing popularity of the scheme among businesses with low R&D expenditure.
The scheme has an incentive effect in that it encourages claimants to increase their R&D expenditure. The ‘additionality ratio’ or ‘bang-for-the-buck’ measure is the additional R&D expenditure that would be generated by an increase in the generosity of the scheme relative to the additional cost incurred by the Exchequer.
The ratio for an SME claim is estimated to range between 0.60 and 1.28 for a one percentage point increase in the additional deduction rate (from 130% to 131%). This indicates that every £1 foregone in tax revenue stimulates between £0.60 and £1.28 of R&D expenditure. The ratios suggest R&D expenditure induced by the scheme exceeds the scheme’s cost to the Exchequer.
With regards to claimants, one avenue for improvement identified was the application process itself as many businesses (84%) received support in applying, and those that did not often found the process more challenging.
Patent Box Evaluations
The Patent Box is a tax relief designed to encourage companies to retain and commercialise intellectual property in the UK. It allows companies to apply a lower rate of corporation tax (10%) to profits earned from its patented (and similarly protected) inventions. As with R&D, there has been a rise in the number of claimants. 1,305 companies claimed PB in 2017-18, obtaining tax savings of £1,101m. There has been a potential 10% increase in assets held in the UK by firms that use the Patent Box compared to similar firms that have never availed of PB relief which is a positive development.
So How Can We Help You?
We have a proven track record with HMRC in supporting our clients across a wide range of sectors in preparing claims for R&D tax credits and the Patent Box in Northern Ireland and the rest of the UK.
There are substantial opportunities available through the UK R&D tax credits and Patent Box regime and we would welcome the opportunity to discuss these with you.
Our experts in sectors such as engineering, manufacturing, science, food & drink, technology and software are available to discuss the potential benefits to your business and can help maximise the potential benefits of the claim.
If you would like to know more about R&D Tax Credits, please get in touch to arrange a no-obligation discussion.