What HMRC's most recent R&D statistics reveal about the status of UK innovation

The number of R&D claims made by companies in the UK saw a significant decrease of 21% in the 2022-23 tax year, according to statistics revealed by HMRC on 26 September 2024.

These figures are unsurprising given the R&D tax incentive has gone through an evolution of change and the stricter compliance measures surrounding the incentive are starting to have the desired effect of curtailing the number of smaller companies making claims.

HMRC have adopted a firm approach to the R&D tax incentive in attempt to clamp down on error and fraud by introducing mandatory reporting requirements for all companies (the Additional Information Form), strengthening the resources the Department has, and by increasing the number of compliance checks into R&D claims (which can potentially be triggered by information provided by companies as part of their reporting requirements).

The total number of R&D claims made by companies has fallen from a high of 87,325 in 2020-21 down to an estimated 65,690 in 2022-23 (a level similar to that of the 2017-18 tax year). Of this, the decrease is hardest felt by small and medium sized (“SME”) companies. The number of SME R&D claims fell from 76,500 in 2020-21, down to 55,325 in 2022-23.

In contrast, the R&D tax incentive available for larger companies (“RDEC”) has seen a much lower level of decline and the actual value of the R&D tax relief awarded to larger companies has increased.

Large companies constituted 6% of total claimants in 2022-23 but claimed one-third of the total £7.5bn R&D tax relief awarded in that tax year. Although the total number of R&D claims made by large companies has decreased, the average value of their R&D claims has increased steadily year-on-year since 2020-21.

The statistics revealed this week indicate that there is a shifting of the award of the tax relief away from smaller companies toward larger companies. At the same time, the rates of tax relief have increased for larger companies in the same timeframe increasing from a rate of 11p in every £1 spent on qualifying R&D expenditure to a rate of 15p-16p in every £1. Furthermore, new rules that have come into effect for accounting periods beginning on or after 1 April 2024 are likely to drive ownership of R&D projects up the supply chain and away from the smaller business conducting the R&D activities and into the hands of larger companies outsourcing their projects.

A separate and more generous incentive (worth up to 27p in every £1) is now existence for R&D-intensive loss-making SME companies who can illustrate that a certain percentage of their total expenditure relates to qualifying R&D. Whilst this may act as a safety net for start-ups or pre-revenue businesses, it is possible that small companies in the middle of the supply chain could be caught out by the future of the R&D incentive.

The statistics also reveal a trend that R&D tax relief is being better focused towards the traditionally more R&D-intensive sectors.

Whilst all sectors experienced a reduction in the total number of R&D claims made in 2022-23, the reduction was lowest in the IT, Manufacturing and Professional, Scientific & Technical sectors. These sectors have traditionally accounted for the majority of the tax relief awarded, and these sectors now account for over 65% of this.

It is unsurprising that the biggest reduction in claims made were in sectors such as Accommodation & Food, Real Estate, Wholesale/Retail Trade, and Education – all of which saw a reduction of 40% or more.

The total number of R&D claims made in the South-West decreased in line with the national average, reducing by 20% to a total of 4,995 claims made in 2022-23.

The Professional, Scientific & Technical sector in the South-West saw an increase in the total tax relief claimed, increasing from £60m to £75m. The total tax relief awarded in the South-West was £335m in 2022-23, nearly 5% of the UK’s total tax relief. The majority of tax relief is awarded in London and the South-East; however this may be distorted by the number of businesses registered but not necessarily physically active in those locations.

HMRC’s statistics illustrate some cause for concern with a suggested significant drop-off in the estimated number of first-time R&D claimants. The number of companies making their R&D claims for the first time looks to decrease to the lowest levels since 2013-14.

Although the figures for 2022-23 are only partial results for first-time claimants, the suggested drop-off is steep. The average number of first-time applicants has hovered around 19,000 per year for the past four years, but could be on track to drop down to below 10,000 for the 2022-23 tax year.

New rules introduced have now made it mandatory for first-time claimants to pre-notify HMRC of their intentions to make an R&D claim. These rules apply to companies with an accounting period beginning on or after 1 April 2023 and, broadly speaking, require a company to pre-notify HMRC within 6 months after the end of their accounting period. Failure to do so will make the company ineligible to make an R&D claim.

It is therefore imperative that newly formed companies have a proper awareness of their reporting requirements, the timeframes required, and the impact the new rules may have on their access to R&D tax relief.

R&D Tax relief, like many incentives and reliefs, could be at risk of only being accessible to those at the ends of the business spectrum; either large companies directing significant projects or start-ups in the early stages of their innovation journey.

The incentive remains valuable to companies who do qualify, but the compliance measures surrounding it may mean that genuine claimants may miss out either through a lack of awareness of their reporting requirements, or because they may be put off making claims altogether because of the landscape in which HMRC now police it.

Whilst it is early to make predictions, it is anticipated that the statistics for the 2023-24 tax year could reveal a similar trajectory. Care will need to be taken by policyholders to ensure that R&D tax relief is rightly focused in the intensive sectors more likely to be undertaking qualifying R&D projects, but that innovative companies centred in the supply chain are not frozen out of making claims, thus stifling their ability to grow and compete.