The value of R&D tax credits relief claimed by UK businesses has fallen for the first time since the scheme began in 2000, down by £275m in a year
by Phil Kinzett-Evans
Research by UHY Ross Brooke, a member firm of the accountancy group UHY Hacker Young, found that the value of claims fell by 4% from £6.9bn in 2019/20 to £6.6bn in 2020/21.
The drop has been caused by HMRC becoming ‘stricter’ in approving claims for R&D tax credits following a rise in suspected fraud in 2020.
Research and development tax credits play an important role in the UK economy as they give businesses an incentive to improve productivity and drive innovation.
R&D tax credits encourage innovation
The fall in R&D tax credit expenditure risks hindering the UK businesses’ ability to remain competitive in the global ‘innovation race’, the firm warned.
The UK will find itself dropping further behind the rest of the world in terms of R&D expenditure if HMRC blocks tax relief claims that it should be approving. Nobody wants fraudulent claims to get through but similarly, businesses need to have certainty over how their R&D spend will be treated.
UK businesses need the incentive to take the risk of pursuing innovative projects that might not result in an immediate return. If businesses aren’t supported appropriately in a recession a lot of those projects will get cut.
How does R&D tax relief work?
The relief allows companies to reduce their corporation tax bill based on the money spent by the business on research and development projects. SMEs can currently claim up to 33% for every £1 spent, whilst larger companies can claim 11% back in relief.
The UK already lags behind other countries when it comes to the percentage of GDP spent on R&D, making any reduction in R&D spending a worry.
The UK spent 1.7% of its GDP on R&D in 2019, compared to an EU average of 2.1% (2020). It is even further behind other major economies, with South Korea, Japan and the US spending 4.6%, 3.2% and 3.2% respectively.
The drop in R&D claims approved comes following a wave of suspected misuse of the R&D credits schemes in 2020. HMRC is now attempting to clamp down on ‘error and fraud’.
In its 2021/22 annual report, HMRC said it suspected that £469m of R&D relief expenditure involved error or fraud. This is a 40% increase from £336m in 2020/21.
The UK government also announced legislation in the March 2021 budget designed to make it harder for R&D to be falsely or mistakenly claimed by businesses. This included adding extra administrative steps to verify applications.
HMRC extended the deadline for processing R&D tax credits from 28 days to 40 days in June 2022 due to ‘increased scrutiny’.
HMRC is right to want to clamp down on error and fraud in R&D tax credit expenditure, but the risk of scrutinising too many applications too closely is harming internal investment in innovation in UK business and ultimately, therefore, innovating itself, in a highly competitive global market, where the UK stands to lose out significantly.
If you would like to discuss R&D tax relief with one of our specialist R&D accounting team, we’d love to hear from you, find out about our Research and Development tax relief services or fill in the form below to receive your free copy of our UHY Research & Development Guide.