HMRC publishes evaluation of R&D Tax Relief for SMEs

As HMRC publishes evaluation of R&D Tax Relief for SMEs, we take a closer look at the findings:

The latest evaluation of the R&D Tax Relief for small and medium-sized enterprises (SME) focusses on the direct and indirect impacts it has on these businesses.

The scheme is designed to encourage eligible businesses to invest in innovation by incentivising greater R&D expenditure. The scheme works by reducing a company’s Corporation Tax liability (deduction claim), with the option of receiving a cash payment if the company is loss making (credit claim).

The evaluation report, published by HMRC, also lays bare just how much work remains for tax credit specialists to become the ‘go-to’ body for businesses seeking to make a claim.

At a time when the government is standing shoulder to shoulder with companies who invest in innovation, it is a constant source of frustration that the uptake in claims remains relatively low.

New statistics published by HMRC in September reveal that a total of £105million was paid out to Northern Ireland businesses in R&D Tax Credits, up from £75million on the previous year.

The total number of claims stands at 1,615, however, Northern Ireland is still one of lowest regions for claims. The average received per R&D tax claim by companies in Northern Ireland was £65,015 which was an increase of 14% on the previous statistics, compared to those in London benefitting from the highest average claim of £129,865.

The evaluation report surveyed a wide range of companies who didn’t file a claim and companies who did seek tax relief.

In some cases, making a tax credit claim had provided a boost to the business’ financial health and resulted in a change in mindset around R&D.

They had been both encouraged by the potential to save money and enabled by the money they had already saved to be more ambitious and take on either larger, or more challenging projects.

By reducing the cost of R&D, the tax relief reduces the level of risk attached to certain projects. A number of businesses stated that the existence of the tax relief helped tip the balance of risk versus benefits in a positive direction.

Major obstacles revealed

The survey results reveal the major obstacles to making a claim include not being able to identify R&D work (33%) a lack of understanding about the process (31%) and issues with identifying qualifying expenditure (25%). These are all areas where a specialist brings added value to ensure the optimum benefit.

There are also issues around the lack of understanding of the existence of R&D Tax Credits. The report stated: “Many businesses in the qualitative interviews had little to no awareness of the types of grants available for R&D expenditure. Moreover, some businesses raised concerns about the administrative burden of grant or subsidy funding.”

This is something the Momentum Group works incredibly hard at reversing and we will continue to bang the drum on the benefits of Tax Credits as ultimately our clients will be the winners.

At Momentum, as our business grows, we forge lasting relationships with our clients, and we have testimonies from many satisfied customers. We are proud to stand behind the quality of our work which has helped grow our list of clients.

We also recognise that as an industry there is plenty of work to do before the majority of claimants turn to R&D Tax Credit specialists for their services, but we are confident this can be achieved.

External support critical

The report reveals approximately 84% of claimants used external support to complete the application process for the R&D tax relief. Of those that used external support 49% used an accountant and 34% used an R&D tax relief specialist.

Quite a lot of companies consider tax credits to be a general tax issue and they are often left to the accountancy department to deal with.

But, in reality, this is an area where investment in tax credit specialists can pay dividends. In fact, it’s one reason why we work in partnership with accountants across the UK; they know the best results for their client will come from working with the experts.

Effectiveness of the scheme

We have always known how R&D Tax Credits can support companies who invest in innovation, but the report also sets out key findings about the effectiveness of the scheme.

It states: “Taken together, the findings from this evaluation suggest that the scheme generates direct, indirect, and spill over effects benefiting not only businesses that claim under the R&D tax relief scheme for SMEs but the economy as a whole.

“As such, the scheme can be seen as satisfying its general and specific objectives. In addition, there is no evidence that the scheme distorts competition. Although recent evidence suggests that businesses may not be as responsive to tax incentives as in previous years, the scheme still continues to incentivise R&D that would not have taken place otherwise.”

Compelling arguments for investing in R&D

The report goes on to identify findings which can be used to make compelling arguments why a company should invest in R&D.

These findings include evidence of how an R&D Tax Credit claim:

• Benefits your company over the competition. According to the report: “R&D will have a negative knock-on effect on the turnover of other businesses that undertake R&D in the same sector. This may be due to a market competition effect among these businesses. In other words, an increase in the R&D expenditure of one business leads to a decrease in another business’ turnover within the same sector due to market competition.”
• Inspires innovative behaviour within the company. The report reveals: “Claimants show increases in innovative behaviour as more patent applications are filed in the year that they first claim under the scheme and the average number of patents filed per claimant increases in subsequent years.”
• Leads to further claims. According to the report: “Businesses are more likely to repeatedly claim R&D tax relief after claiming for the first time, as the drop-out rate associated with the scheme has steadily declined over time from over 40% in 2002– 03 to 20% in 2015–16.”

Help is available

When running a business, few senior personnel have the luxury of time to take on additional duties. This issue came across strongly during the evaluation process with a number of those surveyed revealing their concerns about investing time in researching R&D claims.

Examples of responses included:

• “I have not got the free time to research any of this [availability of government grants] for what would probably come back as a negative anyway.” Business in manufacturing sector, 20–49 employees, North West of England.
• “With anything to do with government stuff it’s never quite straightforward…you have to weigh up the opportunity cost of you spending three months going through an application process versus three months doing the actual work.” Business in information and communication sector, 5–19 employees, London.

At the Momentum Group, as R&D tax credit consultants we have the experience and expertise in working directly with companies to conduct strategic reviews of their business before putting strategies in place to identify wide-ranging R&D and innovation opportunities.

We add optimum value by saving companies the time commitment of preparing claims themselves, we have a deep understanding of the process with strong working relationships with HMRC and we have a proven track record of identifying qualifying work.

Fit for purpose

The evaluation also considers whether a tax relief is the most appropriate financial instrument to incentivise R&D expenditure.

In quantitative interviews, 56% of claimants stated that they would not change their level of R&D expenditure if they received the amount of tax relief that they claimed in the form of a grant or subsidy at the start of the financial year before undertaking any R&D.

However, 39% reported that they would increase their R&D expenditure under this hypothetical scenario. Findings from the qualitative interviews supported these results, suggesting that access to matched-funded grants is appealing to some businesses.

Lack of awareness remains greatest problem

However, many businesses in the qualitative interviews had little to no awareness of the types of grants available for R&D expenditure.

Again, this tells us that companies who innovate will continue to do so with or without tax relief. It is at the core of their business.

But if you are already doing the work and the government is lining up behind you to support this work through R&D Tax Credits. Specialists, like the Momentum Group, have the experience to identify all grants available to companies who invest in research and development work.

Take action today

If your company invests in R&D and you don’t currently claim tax relief on it then you need to speak to our team. The Momentum Group can help you identify qualifying work and ensure you receive the rewards your work deserves. What is clear from the HMRC survey is that you could benefit by increasing your awareness of the tax relief available and we can help you do just that.