To me, there are important lessons we can draw out and implications for the design and management of the two major R&D tax relief schemes.
Overall, the 2020-2021 data delivers a real mixed bag, with significant downward shifts in R&D tax claims value and a major dip in the level of R&D investment reported by claimants. It is underlines that the RDEC large company scheme is still be used predominantly by SME-scale businesses.
The biggest headline was a decrease in the overall claims for R&D tax relief. The first ever drop in the overall cost of the current R&D tax relief schemes. Claims value dropped by 4% to £6.6 billion, while the R&D investment associated with claims dropped by 11%, to £38.1billion.
The Covid pandemic and lockdown seems to have had a major impact on R&D claims. Working practices changed overnight in March 2020, switching to remote working, and many businesses have slimmed down R&D, refocused innovation or battened-down into cash-protection mode.
Interestingly while the financial total of claims dropped, the overall number of claims increased by 7%, to nearly 90,000 claims, while the average claim size dropped. This suggests that UK SMEs became increasingly aware of the scheme and as they were under pressure from the pandemic, directors sought every angle to get precious capital back into their balance sheet.
The RDEC scheme, nominally for larger businesses, predominantly featured claims from smaller businesses. When 61% of a scheme designed for larger businesses, is being used by SMEs it suggests that the whole scheme is long overdue for review and simplification. It also suggests that SMEs can manage the more complex claims process that is needed for RDEC. We will be pressing for change in the way the scheme is designed to focus on radical simplification, preferably with a single scheme for all businesses irrespective of turnover or number of employees. A single scheme for all businesses, using the best of the RDEC scheme, while maintaining the level of incentive and benefit in the current SME scheme, appears a sensible way forward.
These statistics suggest that innovation investment in 2020-21 remained robust given the intensity of the economic storm that blew in with the Covid pandemic. It also reminds us that directors of SMEs, when under pressure will search, entirely legitimately, for the tax relief to improve their cash position. It also suggests that there are deep reserves of resilience and adaptability in our UK SME community. Business leaders were still investing and preparing to succeed as the economy evolves in a post-Covid environment.
Given our current inflationary economy, with the rapidly growing cost of capital and a fast-changing compliance checking landscape at HMRC, I would encourage every company director to make sure that they are claiming the R&D tax relief to which they are entitled. And, to do so in partnership with a reputable, national, and long-term player in the tax advisory sector. A partner who can help you navigate the vagaries of HMRC claims, compliance and enquiries processes, and who will keep you updated on the latest news from the Treasury as tax policy continues to evolve at dizzying pace as the Conservative party leadership changes.
As ever, if you have any comments or queries on what we can do at Easy R&D to support you and your business to optimise the value of R&D tax relief or RDEC claims, please do email or call us. We always love to hear from our customers and partners.
Managing Director, Easy R&D
Every customer and every claim we work with benefits from our deep expertise in how HMRC manages R&D tax credit applications.