Tax relief experts talk a lot about our frustration that so many UK businesses fail to claim the tax credits they are entitled to. I have previously explained on Accountancy Today, on how our own research highlighted that more than half of potentially eligible firms are not claiming R&D tax relief.
But there is good news — the number of claims is rising. According to the most recent government figures released this month (October), there has been 48,635 R&D tax credit claims recorded for 2017/18 so far, equating to £4.3bn tax credits based on £31.3bn of qualifying costs.
This is only partial data as more claims will continue to be submitted but it is expected to result in a 20% like-for-like increase on the number of claims recorded for the previous 12 month period once the data is complete.
The full count of R&D tax relief claims for 2016/17 was 20% up on 2015/16, which itself saw a 22% increase from 2014/15.The data shows an accelerating upward trend in the number of claims since 2012/13. So, perhaps we are winning the battle.
There are many reasons for this:
- In 2012, HMRC removed the requirement for minimum R&D expenditure of £10,000 while also removing the PAYE cap, opening the scheme up to many more businesses.
- In 2014/15, the value of the tax credits available to SMEs rose from 11% to 14.5% and the following year the SME enhanced expenditure rate increased from 125% to 130%, making the scheme even more attractive.
Essentially there has never been a better time to apply for R&D tax relief as the average claim among our clients now stands at £56,000, an amount that could make a huge difference for most firms.
Furthermore, there are a couple of other considerations that should add an element of urgency for any company with potential claims sitting idle, for example: HMRC recently cleared its huge backlog of R&D claims.
Which suggests the average processing time between an R&D claim being submitted and the money from HMRC being paid out has dropped from four or five months to five or six weeks.
This is a major added incentive to submit claims as any business needing a quick funding injection can now look at their R&D tax relief entitlements as a potential source. The big question is, will HMRC – which like other government departments experiencing stringent cuts during the austerity years meaning fewer staff doing more work – be able to stay on top of the incoming R&D tax credit applications to ensure speedy payment or will they fall behind once again?
The answer to this is likely to become clear during the period between December and March when the tax authorities usually see a flurry of applications coming in to meet the annual deadline.
Then there is an impending Budget which has been delayed from its original date but must be called again soon, before or after a potential election, and which may herald new changes to business tax rules.
There is no way of knowing if the overall Budget outcomes will make R&D tax credits more or less attractive until it is unveiled.
What we do know, however, is that the final draft of the new anti-abuse measures announced in last year’s Budget and consulted on in the spring, will be revealed. These changes are set to reintroduce the PAYE cap on SME tax credits.
The proposals would mean the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year.
There is widespread concern among tax relief experts that the changes may unfairly penalised small and start-up businesses that have low payroll costs. HMRC is aware of these worries so it will be interesting to see how far they go to mitigate any such effect.
Finally, after three years of wrangling and political ducking and weaving, a Brexit deal also looks likely to become a reality within the next three months, if not sooner.
However, reassurances have been given. HMRC has stated that the Competition and Markets Authority (CMA) is due to take on the role of state aid regulator
will take on the EU’s role over these issues and has (I think they’re referring to HMRC in this part) made it clear that there will be no changes to the current R&D tax relief regime post Brexit.
Where Brexit is likely to have a significant impact on UK businesses is the level of foreign investment which, if forecasts are to be believed, will drop. The UK has already seen a stagnation in business investment amidst the ongoing political uncertainty.
What many forget is that even after an initial Brexit deal is agreed, uncertainty will continue for many more months, even years, while the UK negotiates new relationships and trade deals with the rest of the world.
This is against a backdrop of a global economic slowdown partly triggered by the escalating trade war between America and China. So, in this climate of unease, tax relief is more crucial than ever to boost profits, reduce the cost of R&D and fuel further innovation.
Mark Tighe, founder and CEO at specialist tax consultancy, Catax.