16 Oct 2019

Which industry sectors are the best at claiming R&D Tax Credits for their business?

Ian Davie
Senior Consultant

HMRC has released the latest data for companies claiming on the highly beneficial R&D Tax Credits scheme. The data covers 2017/18, and I could tell you how much was claimed by how many companies and how much those individual companies claimed, but my question is “which industry sectors are the best at claiming their R&D Tax Credits?”

As a quick recap, what are R&D Tax Credits? There are two schemes in the UK:

  • The SME Scheme (<500 employees, <£88m turnover and <£75m balance sheet).
  • Research & Development Expenditure Credit (know as RDEC) for Large Enterprises who fall outside of the above restrictions, or for SMEs who funded projects with grant money.

Both schemes allow companies to claim back Corporation Tax for eligible expenditure on the research for and development of new and improved products, processes and services. Qualifying R&D work must seek to overcome significant technical challenges and represent an advance in the current state of knowledge at an industry level.

For example, a profitable SME company spending £100,000 to develop a new product, could reduce their Corporation Tax bill by £24,700. If they are loss-making, this could be realised as a cash payment of between £18,850 and £33,350.

That is of huge benefit to any company developing or improving products, processes or services!

HMRC’s latest data tells us that so far for 2017/18 (HMRC’s financial year is April to March) 47,050 companies claimed against both schemes, which is so far less than the 50,455 that claimed for 2016-17, and not much more than the 41,910 that claimed in 2015-16. Although this looks like a drop-off in the number of claims, it is misleading as the claims for both 2016-17 and 2017-18 are still incomplete (companies are able to claim two full years ‘back’).

I have done some analysis comparing the 2017/2018 claim period with previous claim periods. From this I think it is likely that the final number of companies claiming for the period April 2017 to March 2018 will be 76,000. This is based on previous growth rates for R&D claims, which show no sign of slowing down, but also little sign of accelerating further.

That is some growth from the 8,470 companies that claimed R&D Tax Credits 10 years ago!

Linking the sectorial claims information from HMRC to some data from the Office of National Statistics uncovers the penetration of the scheme into different sectors. This finally answers the question of “which industry sectors are the best at claiming their R&D Tax Credits?”, and reveals some really interesting differences!

Manufacturing is the clear winner, with 11% of all companies whose primary sector is manufacturing, being likely to claim R&D Tax Credits in 2017-18. This represents over 15,000 companies out of 136,000, with the average claim being worth £46,970 per SME company.

There are several sectors where there is a low claim rate, particularly companies in the arts, entertainment, real estate, construction, transport, storage, accommodation and food all being under 1% of companies claiming.  These represent 860,000 businesses where there could be innovation in these sectors.

Which sector is the next best at claiming their R&D Tax Credits? That would be Information and Communication, with 7.5% of 219,000 companies claiming on average £57,197 per SME claim. Are there more companies within this sector that could be claiming? Almost certainly, given that this sector is technology driven and one of the fastest growing; with a 4% growth in the number of companies in the last two years.

Are there any sectors potentially under-claiming their R&D Tax Credits? The claim rate in the Professional, Scientific and Technical sector caught my eye. These are businesses that are innovation focused, R&D heavy and that are developing the ‘scientific stuff’ of the future.

However, only 2.7% of companies are likely to be claiming R&D Tax Credits in this sector. Why are companies in this sector with eligible R&D costs not claiming? It is difficult to say, without investigating every single one of the 96,000 companies that list this as their primary sector!

Why do I think there could be more companies claiming? Firstly, the average SME R&D claim in this sector is a whopping £72,260 per claim per year, which is the biggest of all the sectors. This potentially shows smaller companies are not claiming. My second point is that only 2.7% of professional and technical companies are claiming in a technology driven sector.

There are numerous scenarios under which companies in these and other sectors can make a claim:

  • SME businesses using their salaried staff or subcontracted businesses to developing their products, processes or services, with or without grant funding assistance.
  • Large enterprises spending their own money to develop products, processes or services.
  • Subcontracted SME companies completing R&D for large companies.

If these broad descriptions of R&D sound familiar to you and your business, then you should definitely be looking into R&D Tax Credits.

From ten years ago where 8,470 companies claimed, in 2017/2018 there will be over 60,000 businesses in all sectors who have started their first R&D Tax Credits claim. That is truly an astonishing number for what has proved to be a successful business support scheme for companies in the UK. What is encouraging is that there is likely to be another 60,000 companies that could be claiming, who currently aren’t! This concession comes from HMRC themselves, who recognise that most companies that could be claiming don’t.

If you are one of the 60,000 businesses not yet taking advantage of the generous R&D Tax Credit schemes, have any questions around R&D Tax Credits legislation, how it could work for your business and whether you have eligible costs, then please don’t hesitate to get in touch with TBAT.

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