VIEW THE HMRC R&D TAX STATISTICS 2023
For the first time ever, the total value of relief awarded to businesses claiming research and development (R&D) tax credits has fallen. The period in question covers the COVID pandemic, so perhaps this is no surprise. However, a double digit decrease in R&D expenditure demonstrates the need for continued reform of the incentive to ensure it remains fit for purpose as a driver of economic growth.
Arguably the most illuminating update is buried in the depths of HMRC’s report. The reference to an update from the Office of National Statistics (ONS) that reveals a new methodology is a big step to reconciling HMRC’s statistics with those in the ONS Business Enterprise Research and Development (BERD) survey. This has major implications for the future direction of R&D tax policy.
Reduction in reported R&D expenditure
Proportion of relief awarded to top three R&D sectors
Number of RDEC claims from SMEs
Key R&D tax credit trends
As the nation faced up to the social and cultural impact of the pandemic, UK businesses also came under pressure but, despite the challenges, many continued to innovate.
The R&D statistics analysed here cover the early chapters of the COVID-19 period. Some of the key trends we have identified are expected. The value of R&D tax relief fell for the first time but the number of businesses claiming rose, signalling that businesses did not stop innovating. Others raise more questions than answers, in asking whether the data misrepresents the levelling up impact of R&D, or if the simplification of the R&D tax incentive is nearer than we think. Some trends have the potential to permanently reshape the R&D policy landscape.
Overall, these statistics offer up a compelling image of UK innovation, one of adaptation, consolidation and the seeds of recovery. There is much here to learn for business, HMRC and advisers alike, not least how to build innovation resilience.
Trend one
Did the pandemic cause a first ever decrease in the value of R&D tax relief claimed?
Headline figures show a decrease in the total value of R&D tax relief claimed (4% down from the previous year) – although the total number of claims did go up. HMRC make no comment on what factors could be behind this, raising questions about the extent of the impact the pandemic had on investment in innovation.
HMRC’s tendency to focus on cost over value when it talks about R&D tax relief exacerbates the disconnect between the positive policy intent and its implementation. Through the lens of this ongoing campaign against error and fraud, these latest figures could, perversely, be viewed as success – rather than an indication that innovation took a back seat as businesses prioritised dealing with the more immediate challenges of the pandemic.
ForrestBrown has consistently called for a renewed statement of intent for R&D tax relief. This would communicate a more positive message which recognises the wider economic benefit of supporting our most innovative businesses.
Trend two
Does the skew towards London mask the levelling up impact of R&D?
As usual, HMRC’s statistics show the regional breakdown of R&D comes with a caveat – the distribution is based on a company’s registered address and is not necessarily representative of where R&D activity is carried out.
Taking London out of the picture provides a clearer view of the regional spread of R&D. Proximity to the capital is still a factor, with the East of England the next hotspot for R&D investment, potentially fuelled by the innovation cluster around Cambridge.
Claims are more evenly spread between other regions, although the South West is at risk of falling behind in terms of total expenditure – despite being known for its innovative start-up culture. This could be a result of expenditure by large players in the region being attributed to London HQs.
Trend three
Investment continues to consolidate in key sectors for R&D
The Information and Communication, Manufacturing and Professional, Scientific and Technical sectors continue to dominate, accounting for 70% of the total value of relief reported.
The fact that these R&D-intensive sectors are performing well indicates the incentive is delivering the desired results and is well targeted towards businesses making scientific and technological advances.
The data also shows that sectors such as Information and Communication more easily adapted to the shift to remote working necessitated by the pandemic. This contrasts with the challenges experienced in industries such as manufacturing and construction – shutdowns, social distancing and supply chain disruption.
Trend four
‘RDEC for all’ moves closer to becoming a reality
Research and Development Expenditure Credit (RDEC) claims increased by 7%. Counter-intuitively, this uptick in claims – using an incentive designed for larger companies – was driven by SME activity, which accounted for nearly two-thirds of the total.
There is potential for this anomaly to have been underwritten by HMRC’s narrow interpretation of subcontracted and subsidised R&D, which often results in SMEs being required to claim through the less generous RDEC scheme. The high-profile Quinn case shone a spotlight on this issue, but uncertainty remains.
In the ongoing consultation on reform of R&D tax reliefs, ForrestBrown has backed bringing the two incentives together under ‘RDEC for all’, retaining the higher rate of relief for SMEs. This approach could bring better visibility, certainty and simplicity to the relief. Critics argue smaller companies would struggle with the complexity of adapting to RDEC. But the growing cohort of SMEs already accessing the scheme would suggest otherwise.
Trend five
Methodology update may trigger policy rethink
We have long held that discrepancies between the HMRC statistics on R&D tax reliefs and the investment in R&D reported by the Office for National Statistics (ONS) in its Business Expenditure on Research and Development (BERD) survey should be scrutinised in order to make better informed policy decisions. An ONS paper published alongside this year’s HMRC statistics finally makes good on this ForrestBrown recommendation.
The ONS should investigate why there’s a growing discrepancy and report this back to the public. Jumping to conclusions could unnecessarily harm the R&D tax credit incentive and the businesses that benefit from using it.
Jenny Tragner, ForrestBrown
Accountancy Today, October 2020
The paper includes some eye-catching ramifications for the future implementation of R&D tax reliefs. Previous iterations of the data showed an increasingly big gap between the ONS and HMRC figures. Changes in the ONS methodology has reversed this outcome. This raises questions regarding HMRC’s hard-line approach to compliance. The scale of abuse may have been overstated.
Similarly, recent moves to exclude R&D activity carried out overseas were, in part, informed by the gap between the two sets of data. The revised figures suggest the perceived benefits of this policy change may well be outweighed by its negative impact on the attractiveness of the UK as a location from which to conduct global R&D programmes.
Find out more about the innovators driving R&D investment
ForrestBrown works with some of the UK’s most innovative companies, giving us a unique insight into the R&D process. Our recent ‘Life of a CIO’ research explores how Chief Innovation Officers at companies in R&D-intensive sectors are approaching the challenges and opportunities ahead.
Benchmark my R&D claim
Are you one of the 84,565 businesses already investing in innovation and making an R&D tax credit claim?
If so, you’ll want to check how your R&D tax credit claim stacks up against businesses in your region and your sector for peace of mind that you’re making the most of this valuable source of funding.
Average RDEC claim
Average SME claim value
Benchmark your R&D tax credit claim by region
How does your R&D tax credit claim compare to your peers?
And where are those businesses based? A quick note: Regional allocation is based on the postcode of the company’s registered address, which might not correspond to where R&D takes place.
R&D in the North East
With a population of two million people across an area featuring urban, rural and coastal locations, the North East is a hotbed for green energy. Building on a proud industrial heritage, the region is reinventing itself as the crucible of the renewables revolution, with supply chains to support its world-leading offshore wind sector.
- 8,590 SMEs
- 370 Large companies
- 575 SMEs in large companies & RDEC
- £340m SMEs
- £55m Large companies
- £25m SMEs in large companies & RDEC
- £39,581 SMEs
- £148,649 Large companies
- £43,478 SMEs in large companies & RDEC
R&D in the North West
Accounting for 10% of the UK’s GDP, the North West’s role as an industrial powerhouse dates back to an era when its textile industry supplied markets across the globe. Today, the region is leading the way in life sciences, creative and digital.
- 8,445 SMEs
- 370 Large companies
- 575 SMEs in large companies & RDEC
- £360m SMEs
- £95m Large companies
- £25m SMEs in large companies & RDEC
- £42,629 SMEs
- £256,757 Large companies
- £43,478 SMEs in large companies & RDEC
R&D in the Midlands
Building on its heritage as a hub for the automotive industry, the Midlands is branching out to pioneer new modes of transport. The region is home to centres of innovation in Very Light Rail, advanced propulsion and battery industrialisation, all helping to drive changes in the way we travel.
- 12,165 SMEs
- 560 Large companies
- 835 SMEs in large companies & RDEC
- £510m SMEs
- £205m Large companies
- £40m SMEs in large companies & RDEC
- £41,924 SMEs
- £366,071 Large companies
- £47,904 SMEs in large companies & RDEC
R&D in the East of England
The East of England’s centuries-old seats of learning have fuelled a start-up culture from which innovators in high-value sectors such as biotech and pharmaceuticals have emerged. Away from the region’s urban centres, its coast is a hub for low-carbon energy, from nuclear to offshore wind.
- 7,410 SMEs
- 305 Large companies
- 615 SMEs in large companies & RDEC
- £455m SMEs
- £265m Large companies
- £40m SMEs in large companies & RDEC
- £61,404 SMEs
- £868,852 Large companies
- £65,041 SMEs in large companies & RDEC
R&D in London
As a global financial centre, it’s no surprise that so much fintech innovation has started in London. Access to capital coupled with a world-class professional services sector makes London the ideal place for innovative businesses to start and scale. ForrestBrown’s office in Tower42 puts us at the heart of this thriving innovation ecosystem.
- 16,390 SMEs
- 1,035 Large companies
- 1,365 SMEs in large companies & RDEC
- £1.3bn SMEs
- £680m Large companies
- £105m SMEs in large companies & RDEC
- £78,096 SMEs
- £657,005 Large companies
- £76,923 SMEs in large companies & RDEC
R&D in the South East
With London on its doorstep, the South East is home to international business in established sectors including pharmaceuticals, engineering and aerospace. There are also thriving clusters for new technologies, from AI to cyber.
- 11,320 SMEs
- 670 Large companies
- 1,010 SMEs in large companies & RDEC
- £675m SMEs
- £470m Large companies
- £65m SMEs in large companies & RDEC
- £59,629 SMEs
- £701,493 Large companies
- £64,356 SMEs in large companies & RDEC
R&D in the South West
The diverse South West combines Bristol’s strong financial services and aerospace sectors with marine, energy and climate science specialisms centred around coastal areas. The consistent factor is the region’s creative spirit, which has led to Bristol being ranked the most innovative city outside London according to a 2021 study.
- 6,195 SMEs
- 225 Large companies
- 495 SMEs in large companies & RDEC
- £240m SMEs
- £70m Large companies
- £20m SMEs in large companies & RDEC
- £38,741 SMEs
- £311,111 Large companies
- £40,404 SMEs in large companies & RDEC
R&D in Wales
From fintech to semiconductors, Wales is home to high profile players in some of the most cutting edge sectors of the economy. Offshore, the Celtic Sea continues to see rapid innovation in renewable energy, with the nation’s deep sea ports providing supply chain infrastructure to support growth and investment.
- 2,415 SMEs
- 85 Large companies
- 205 SMEs in large companies & RDEC
- £105m SMEs
- £20m Large companies
- £10m SMEs in large companies & RDEC
- £43,478 SMEs
- £235,294 Large companies
- £48,780 SMEs in large companies & RDEC
R&D in Scotland
Home to the National Decommissioning Centre in Aberdeen, Scotland is leading the way in transforming its oil and gas infrastructure to be part of a future Net Zero energy system. Home to more overseas businesses than any other part of the UK outside London, Scotland also has thriving digital technology and manufacturing sectors.
- 3,800 SMEs
- 260 Large companies
- 570 SMEs in large companies & RDEC
- £175m SMEs
- £95m Large companies
- £20m SMEs in large companies & RDEC
- £46,053 SMEs
- £365,385 Large companies
- £35,088 SMEs in large companies & RDEC
R&D in Northern Ireland
Home to two leading global universities, Northern Ireland boasts a population with the highest level of education degree completion in the UK. Sector strengths include aerospace, cyber security and precision medicine.
- 2,025 SMEs
- 100 Large companies
- 230 SMEs in large companies & RDEC
- £85m SMEs
- £40m Large companies
- £10m SMEs in large companies & RDEC
- £41,975 SMEs
- £400,000 Large companies
- £43,478 SMEs in large companies & RDEC
Benchmark your SME R&D tax credit claim by sector
The average SME R&D claim value dropped this year, but with many SMEs still claiming north of £50,000 the benefit of the incentive is being felt nationwide. Our sector-by-sector breakdown provides a snapshot of activity in industries where R&D is taking place – and gives examples of potential activities which could qualify for R&D tax relief.
Agriculture, Forestry, Fishing R&D Claims
In this sector, innovation is often driven by sustainability targets. Businesses need to find new ways to increase their yields while minimising their climate impact. The number of claims in this sector has increased marginally from 1,070 to 1,180. With average claim values remaining reasonably stable from £42,735 to £42,373.
What counts as R&D in this sector?
- Experimenting with new renewable energy technology, such as solar, biomass and anaerobic digestion.
- Creating new pesticides, fertilisers, or other chemicals to increase yield.
- 1,180 Agriculture, Forestry, Fishing R&D Claims
- 78,825 All SME Claims
- £50m Agriculture, Forestry, Fishing R&D Claims
- £4.2bn Value of all SME claims
- £42,373 Average claim value for Agriculture, Forestry, Fishing
Mining & Quarrying R&D Claims
This sector forms the bedrock of much of the British economy, with many manufacturers and construction firms relying upon its produce. The scope for R&D in the industry is relatively small – but when R&D does happen, an SME R&D tax credit claim can be significant, with claim values sitting above the UK SME average, at £65,333.
What counts as R&D in this sector?
- Developing new systems to tackle work on structurally fragile sites.
- Creating new processes to extract raw materials.
- Creating a software analysis platform for the mining industry.
- 75 Mining & Quarrying R&D Claims
- 78,825 All SME Claims
- £4.9m Mining & Quarrying R&D Claims
- £4.2bn Value of all SME claims
- £65,333 Average claim value for Mining & Quarrying
Manufacturing R&D Claims
The UK’s manufacturing sector receives the third highest amount overall in R&D tax credits (£805m) with 15,960 SME firms claiming (an additional 435 firms since last year). Though average claims have increased slightly from £48,263 to £50,439 year-on-year, they still remain slightly behind the UK average of £53,663.
What counts as R&D in this sector?
- Designing innovative software-based process controls, i.e. process locking.
- Automating production processes or integrating robotics.
- Modifying existing machinery to be used in a fundamentally different way.
- 15,690 Manufacturing R&D Claims
- 78,825 All SME Claims
- £805m Manufacturing R&D Claims
- £4.2bn Value of all SME claims
- £50,439 Average claim value for Manufacturing
Electricity, Gas, Steam & Air Conditioning R&D Claims
This sector often grapples with the challenges of meeting Net Zero targets. Claim values in this sector have remained static year-on-year, staying above the UK average at £66,667. As we work collectively towards a sustainable future, R&D tax reliefs have the ability to continue to drive innovation in this sector.
What counts as R&D in this sector?
- Designing more sustainable heating and cooling systems.
- Creating appreciably improved ways to retrofit modern systems into listed period buildings.
- 150 Electricity, Gas, Steam & Air Conditioning R&D Claims
- 78,825 All SME Claims
- £10m Electricity, Gas, Steam & Air Conditioning R&D Claims
- £4.2bn Value of all SME claims
- £66,667 Average claim value for Electricity, Gas, Steam & Air Conditioning
Water, Sewerage & Waste R&D Claims
The sector this year returns to its former trend of year-on-year decreases in average claim values. Despite an increase of 3% in the number of businesses claiming in this sector, the average claim value has decreased by 3% from the previous year, again dipping below the national average.
What counts as R&D in this sector?
- Developing new methods to control pathogens.
- Implementing novel energy recovery techniques.
- Developing new, and improving existing recycling technologies.
- 490 Water, Sewerage & Waste R&D Claims
- 78,825 All SME Claims
- £25m Water, Sewerage & Waste R&D Claims
- £4.2bn Value of all SME claims
- £51,020 Average claim value for Water, Sewerage & Waste
Construction R&D Claims
The impact of the COVID-19 pandemic was clearly felt in the construction industry. The pausing of projects, social distancing, and supply chain challenges led to a decrease both in the number of claims submitted year-on-year and a 14% decrease in SME claim values at £46,347.
What counts as R&D in this sector?
- Developing structures from novel construction materials.
- Innovating new methods of construction to introduce automation.
- Integrating new or improved technology into buildings.
- Modifying existing components and fittings into sites with different constraints.
- 6,365 Construction R&D Claims
- 78,825 All SME Claims
- £295m Construction R&D Claims
- £4.2bn Value of all SME claims
- £46,347 Average claim value for Construction
Wholesale & Retail Trade, Repairs R&D Claims
The wholesale, retail and trade repairs sector still accounts for 12% of SME R&D tax credit claims. The average claim value, however, is only 60% of the national average – remaining static at £34,394. Consumer retail is the focus of this category, which has become increasingly digitised over recent years.
What counts as R&D in this sector?
- Using new technology or combining existing technologies to develop e-commerce platforms.
- Recreating existing products using more cost-efficient and eco-friendly materials.
- Developing new, or integrating existing technologies to produce warehouse management platforms.
- 9,740 Wholesale & Retail Trade, Repairs R&D Claims
- 78,825 All SME Claims
- £335 Wholesale & Retail Trade, Repairs R&D Claims
- £4.2bn Value of all SME claims
- £34,394 Average claim value for Wholesale & Retail Trade, Repairs
Transport & Storage R&D Claims
Businesses in this sector are now actively contending with pressures to decarbonise and limit their environmental impact. R&D tax reliefs have provided not just an incentive, but also an opportunity for businesses to contribute to the Net Zero mission while streamlining their processes. With a slight increase in businesses claiming in this sector, SME claims totalled £40m in 2020/21. The average transport and storage claim (£50,000) is up 9% year-on-year, yet is still lower than the average SME benefit.
What counts as R&D in this sector?
- Designing or modifying equipment such as conveyor transfer systems for loading freight.
- Design and development of freight-lifting solutions for industrial premises like freight interchanges or storage facilities.
- 800 Transport & Storage R&D Claims
- 78,825 All SME Claims
- £40m Transport & Storage R&D Claims
- £4.2bn Value of all SME claims
- £50,000 Average claim value for Transport & Storage
Accommodation & Food R&D Claims
Innovation in the food industry usually arises in new product development or in production processes. The number claiming R&D tax credits has increased since last year, however, could be more so. The average claim values sit in the lower quartile in terms of average claim amounts (£18,519) and has decreased by 9%.
What counts as R&D in this sector?
- Creating new chilling and preservation methods to speed up production without affecting the texture of the product.
- Experimenting with reformulation to improve nutritional requirements.
- Creating sustainable, eco-friendly living environments.
- 810 Accommodation & Food R&D Claims
- 78,825 All SME Claims
- £15m Accommodation & Food R&D Claims
- £4.2bn Value of all SME claims
- £18,519 Average claim value for Accommodation & Food
Information & Communication R&D Claims
Information & communication claims make up the largest chunk of SMEs benefitting from R&D tax credits. Computer programming, publishing and telecoms continue to benefit greatly from R&D tax relief, with an average claim value of £63,203. Despite average claim values decreasing slightly from last year, they remain firmly above the UK average SME claim (£53,663). The sector brims with R&D opportunities for its large base of SMEs.
What counts as R&D in this sector?
- Integrating, developing or improving legacy systems.
- Developing tools and frameworks to analyse complex technology environments for threats and weaknesses.
- Using technology to reduce latency in telecoms networks and devices.
- 17,325 Information & Communication R&D Claims
- 78,825 All SME Claims
- £1.1bn Information & Communication R&D Claims
- £4.2bn Value of all SME claims
- £63,203 Average claim value for Information & Communication
Financial & Insurance R&D Claims
With the City of London continuing to attract ambitious fintech entrepreneurs and technical talent, and seemingly remaining resilient throughout the pandemic, the financial services and insurance industry remains robust and innovative. Despite being only a small slice of overall SME claims in quantity, the sector’s average claim is nearly double the average SME claim, having increased again from last year (£101,382 compared to £53,663).
What counts as R&D in this sector?
- Inventing new risk management technology for insurance e.g. telematics, sensors and augmented reality.
- Automation of operations and use of blockchain or DLT.
- Developing and improving on legacy banking systems.
- Integrating open APIs (open banking mandated post PSD II).
- 1,085 Financial & Insurance R&D Claims
- 78,825 All SME Claims
- £110m Financial & Insurance R&D Claims
- £4.2bn Value of all SME claims
- £101,382 Average claim value for Financial & Insurance
Real Estate R&D Claims
After a booming commercial property market in recent years, the number of businesses claiming remains steady. For 2020-21 SME R&D tax credit claim volumes remain at 425, with the average benefit to businesses sitting at the lower end of the spectrum, remaining steady year-on-year with a lower claim value (£35,294) than UK SME’s overall (£53,663).
What counts as R&D in this sector?
- Developing existing or creating new algorithms to analyse rental value and determine the market value of a property.
- Developing new technology to build an online marketplace for housing.
- 425 Real Estate R&D Claims
- 78,825 All SME Claims
- £15m Real Estate R&D Claims
- £4.2bn Value of all SME claims
- £35,294 Average claim value for Real Estate
Professional, Scientific & Technical R&D Claims
Just under one-fifth (19%) of the tax relief claimed via the SME R&D tax credit incentive goes to companies in this category. This broad category encompasses professional services firms, engineering consultancies and advertising agencies – to name a few. While this share remains steady from last year, more businesses are claiming the relief and average claim values remain stable (£69,304).
What counts as R&D in this sector?
- Developing new acoustic and insulation flooring products for use in construction.
- Developing new ways to detect and monitor health conditions.
- Developing new systems to test network security.
- 14,790 Professional, Scientific & Technical R&D Claims
- 78,825 All SME Claims
- £1bn Professional, Scientific & Technical R&D Claims
- £4.2bn Value of all SME claims
- £69,304 Average claim value for Professional, Scientific & Technical
Admin & Support Services R&D Claims
This category encompasses travel agencies, security and investigation activities and general business support services. This subsection of businesses often take on niche and one-off projects, which comprised 6% of the SME claims submitted. These claims are just below the national average, dropping slightly from last year, tipping the scales at £47,619 compared to £53,663 overall.
What counts as R&D in this sector?
- Integrating business software with legacy office systems.
- Developing technologies to create CRM systems.
- 4,515 Admin & Support Services R&D Claims
- 78,825 All SME Claims
- £215m Admin & Support Services R&D Claims
- £4.2bn Value of all SME claims
- £47,619 Average claim value for Admin & Support Services
Education R&D Claims
Many higher education institutes have invested in EdTech to support their students beyond the classroom. The hardware and software development involved in this technology can be complex. The average education SME claim has dropped 15% year-on-year to £30,457, keeping it well below the average SME benefit of £53,663.
What counts as R&D in this sector?
- Developing or integrating technologies to create online platforms to facilitate collaborative remote learning.
- Integrating VR and AR to education software to enable better provision for SEN students.
- 985 Education R&D Claims
- 78,825 All SME Claims
- £30m Education R&D Claims
- £4.2bn Value of all SME claims
- £30,457 Average claim value for Education
Arts, Entertainment & Recreation R&D Claims
Most of the innovation in this sector is specifically ruled out in the definition of R&D for tax purposes. However, more businesses in this sector are claiming than ever before (915) with the average claim value sitting a little below the UK average at £49,180, supporting the sector’s call for a widening of the scope of qualifying activities.
What counts as R&D in this sector?
- Development and use of new technologies to create innovative theatre sets or augmented reality experiences.
- Designing software for online music distribution and collaboration.
- 915 Arts, Entertainment & Recreation R&D Claims
- 78,825 All SME Claims
- £45m Arts, Entertainment & Recreation R&D Claims
- £4.2bn Value of all SME claims
- £49,180 Average claim value for Arts, Entertainment & Recreation
Other Services Activities R&D Claims
‘Other Services Activities’ includes a range of businesses whose activities may be tricky to define, or that don’t typically align themselves to a single sector. This likely goes someway to explain why the claim value is so low. Around 2% of all SME claims align to the other services sector category, generating an average claim value of £34,884.
What counts as R&D in this sector?
- 1,290 Other Services Activities R&D Claims
- 78,825 All SME Claims
- £45m Other Services Activities R&D Claims
- £4.2bn Value of all SME claims
- £34,884 Average claim value for Other Services Activities
A new era for R&D tax relief
R&D tax relief has now entered a period of renewal and reorientation.
HMRC scrutiny is at an all-time high and it’s never been more important to proactively review your claim and sense-check the advice you’re receiving.
Download our market report to learn more about the state of play and what the government’s consultation could mean for your business.
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We’d love to hear from you
ForrestBrown works with businesses at every stage of their growth and innovation journey. The advice you require is unique to you and your business – and we can help you use R&D tax relief to your best strategic advantage. Get in touch to speak to one of our team of chartered tax advisers, sector specialists and former-HMRC inspectors.
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