Innovation is no longer a word only uttered by fast-growth startups, it’s a common business phrase. This corporate creativity leads to research and development, presenting more opportunity for the Research and development (R&D) tax credit scheme to shine and offer relief on any scientific or technological projects.
But for the R&D tax credit scheme to work efficiently, we need accountants to take on the mantle to ensure better awareness for companies that can apply. Now, as the country leaves lockdown, is the time to support innovation – and not just in sectors such as tech, which is already ripe with activity. To support all innovations, we need increased understanding broadly.
The Office of National Statistics’ (ONS) annual R&D tax credit scheme overview is a useful resource for those considering the initiative and we’ve tracked the report over the past several years. The data suggests a fairly broad distribution of qualifying expenditure across sectors, but we realise many businesses miss out, assuming their industry doesn’t qualify for R&D activities. This begins with the scheme being called R&D, implying companies must operate in a field involving white lab coats and pure research rather than applied development, which is still claimable.
What type of companies can claim R&D?
If a company wants to do something different without basing it upon an existing blueprint, this could be fitting of an R&D claim – and that’s a message that isn’t being conveyed. Accountants must do more to educate businesses and help them understand the rules. On the flip side, visiting the generic government website can’t be the only approach that companies take – they must speak with specialists for insight.
One field we’ve worked with clients in is fashion, which isn’t overtly technological at first glance, though it is innovative. One such case saw a UK manufacturer building components to set design believe they were ineligible, however the significant development needed to improve testing and production opened an R&D claim route. These are the stories that need telling to grow the scheme, help scale business and move the economy forward as a result.
Which sectors are getting the relief?
Analysing the ONS data, we saw the manufacturing industry has suffered the largest decline. Since 2014, it’s dropped 5% in value of allocated cost. This is a problem because it means companies in lesser-funded sectors such as manufacturing may not be reaching their full potential, resulting in fewer jobs being created and an inability to compete with R&D-focused competitors overseas.
Comparatively, Information & Communication and Professional, Scientific & Technical sectors have shown an increase for the same period. This suggests R&D tax credits are following broader investment trends – UK tech firms raised a record $15bn (£10bn) last year – rather than supporting a rebalancing of the economy.
Operationally, manufacturing differs greatly from IT, so there are a lot of variables including location and nature of work. But overall the fact manufacturing is trending downwards suggests companies don’t understand what they can claim, reinforcing the role of accountants as educators.
Observing a five-year average for the proportion of claims and the allocated cost for each UK region, London, East of England and South of England are the only regions that repeatedly receive more money than the rest of the UK. Unsurprisingly, London receives up to 10% more money in proportion to its number of claims.
Meanwhile, the North West and Yorkshire and The Humber receive around 4% and 3% less money than their number of claims respectively. The five-year average represents a constant trend of regional bias towards the Golden Triangle and not a one-time blip in the data.
This disparity is increasing rather than dropping – Scotland and the North East show a decreasing trend in terms of the proportion of claims submitted and resultant benefit received. This could be driven by increasing salaries in the Golden Triangle as R&D staff are more in demand, driving up claim values. It also reinforces the R&D claim scheme following the investment in innovation rather than changing behaviour to support under-represented areas of the UK.
However, I believe areas away from the south stand to prosper – not through the scheme evolving per se but as a result of the pandemic forcing change. With so many home workers across the UK today, it’s likely companies will scale back offices in central locations. As many as 38% of Brits worked remotely at the peak in June and this continuing trend may shift the regional balance of R&D tax credits.
We should all continue to monitor the evolution of working practices outside of the Golden Triangle and the regional growth and innovation benefits this can unlock. Ultimately, the government should want the scheme to succeed, so any new changes, whether that’s increased applications in other sectors or areas, must prompt policymakers to adapt accordingly. The numbers of R&D workers undertaking skilled jobs outside the traditional city bases will surely swell – but it’s key we continue to spread the message.
By Iain Butler, research and development director at Buzzacott, the accountancy firm advising fast-growth companies.