HMRC R&D tax credit statistics 2023 – what you need to know

In the ever-evolving UK innovation landscape, the annual publication of HMRC’s R&D tax credit statistics brings intrigue and optimism.

These figures serve as a crucial barometer for the health of innovation-driven enterprises. Although the data is retrospective – the 2023 publication deals with the financial year 2021 to 2022 – as well as provisional (the figures are subject to change since R&D claims may continue to be submitted after the data collection cut-off date of 31 May 2023), it can still help us develop a better understanding of the state of innovation and economic growth in the country.

Key R&D statistic trends

There is much detail to analyse, but first lets grasp the headline significance of these statistics, before delving into the data and unravelling the story they tell.

Surge in total value of R&D tax relief: the road to recovery?

One of the most prominent headlines from the report is the rebound in the total value of R&D tax relief claimed, surging by an impressive 11% to reach £7.6 billion. This surge follows a period of concern sparked by last year’s statistics (for 2020 to 2021), which marked the first decrease in relief claimed since the inception of the incentive over two decades ago. Industry experts and policymakers alike speculated on the underlying causes.

However, a closer look at the data reveals that the decrease in the previous year was less drastic than initially feared. In fact, it was a mere 1%. It’s crucial to note that the volume of claims during that period grew, albeit modestly.

This return to growth in total R&D tax relief claimed signals that the dip experienced in the previous year was attributed to suppressed business investment in innovation. Companies had their sights set on weathering the harsh economic conditions inflicted by the COVID-19 pandemic.

Uncertainty around extent of R&D tax fraud and error

While the upturn in R&D expenditure is undoubtedly positive for the economy, interpreting these statistics isn’t as straightforward as it may seem. An ongoing lack of clarity regarding the extent of error and fraud in the incentive adds a layer of complexity to the narrative. As we await further insights, it remains uncertain how HMRC’s measures to improve compliance will impact next year’s figures.

There is a lingering concern that a volume-based approach to tackling error and fraud could inadvertently affect genuine innovation. Striking the right balance between safeguarding the incentive from abuse and nurturing innovation is crucial. Declining R&D expenditure would not paint a rosy picture for the future of UK innovation. It’s imperative that HMRC manages to curb misuse without stifling the creativity and progress that R&D incentives are designed to foster.

R&D relief claimed by sector: where is innovation thriving?

The statistics also reveal that more than two-thirds of the total relief was claimed by companies in three sectors traditionally known for their innovation intensity: Information & Communication, Manufacturing, and Professional, Scientific & Technical services.

The concentration of claims in these areas highlights the success of the government’s strategy to channel incentives where they are most needed and where they can have the greatest impact on the country’s overall innovation ecosystem.

It also underscores the role of these sectors in driving economic growth and technological progress. The statistics suggest that, despite the challenges and uncertainties, the government’s flagship innovation tax policy is delivering in areas where innovation flourishes.

HMRC R&D tax credit statistics 2023 – beyond the key trends

Following consultation on its publication of statistics earlier this year, HMRC shared supplementary tables alongside its main R&D tax relief data release for the first time this September.

We welcome this move towards greater transparency and, having reviewed the additional data in detail, there are certainly insights we can draw from it. However, the picture remains incomplete, suggesting these statistics should be used with caution by policymakers shaping the future direction of the incentive.

SIC notes: What does HMRC’s sector data tell us about UK R&D?

In addition to the usual breakdown of R&D tax relief data by Standard Industrial Classification (SIC) code, the supplementary tables provide a more granular view, separating these broadly defined sectors into more specific sub-categories. For example, within the manufacturing SIC code there are 24 classifications, from food products to pharmaceuticals.

Manufacturing remains the sector where most R&D tax relief claims are made and this additional level of data provides a snapshot of where innovation takes place within the sector. For example, nearly 2,000 businesses claimed relief for R&D relating to the manufacture of computer, electronic and optical products. By contrast, claims for advances in tobacco products were, not surprisingly, negligible.

These categories become less helpful when looking at a SIC code such as wholesale and retail – an area we know is under HMRC’s compliance microscope. Whilst it’s possible that R&D is taking place in the repair of motor vehicles (we’ve seen good examples of innovation in retrofitting classic models with more environmentally friendly engine technology) it’s difficult to draw conclusions from the data for this sector, where the breakdown into sub-categories is limited.

An example of R&D in the wholesale and retail sector could be the development of risk models or engines that successfully predict high competition stock availability for global group companies, but differentiating qualifying R&D like this from activity which is simply new to the business is not possible with the current data. R&D may be less prevalent in companies with a retail SIC code than those in manufacturing, but there will be companies innovating. The challenge for HMRC is identifying them. Providing a more robust mechanism for businesses to record the type of R&D they are undertaking (rather than or in addition to the current free text box) would enable HMRC to target its compliance activity more effectively.

Another challenge for the SIC code approach is presented by the very nature of innovation. SIC codes are often selected when a business is incorporated, and although they can be updated, this isn’t always a business priority. How can work in a new field of technology be accurately captured by definitions set at a point in time which is rapidly receding into the past as the pace of change increases? And as companies adapt to the changing world around them by pivoting to new markets, SIC codes may no longer accurately reflect the nature of their business.

First time applicants decrease, the beginning of a trend?

Whilst the data published for statistics covering 2021 to 2022 and 2020 to 2021 is provisional (the R&D tax credit claim time limit is two years from the end of your accounting period) there are signs of a trend beginning to emerge in the number of first-time applicants claiming R&D tax relief.

There is a slight but conspicuous decrease in claims made by businesses that are new to R&D tax relief from the 2018-19 onwards. Whilst the reduction is small (2.94% from 2018-2019 to 2019-2020, and 1.01% from 2020-2021 to 2021 to 2022) it is notable because up until this point, the number of first-time applicants had been growing at pace since the inception of the relief – for example, between 2017 to 2018 and 2019 to 2020 the number increased 24.02%.

Whether this is a matter for concern potentially depends on your viewpoint. An increasing number of R&D intensive start ups claiming relief for the first time is a positive sign of a thriving innovation climate in the UK. R&D tax relief is designed to help this type of business through the costly early stages of development and is often a vital part of their funding strategy.

However, the existence of spurious R&D claims in HMRC’s data has been widely reported on, so this slowdown in new claimants could simply be fewer of the wrong type of R&D claim entering the system. The decrease will not yet have been influenced by HMRC’s introduction of measures aimed at improving compliance and curing the issue of error and fraud in the incentive – a side effect of which has been collateral damage to legitimate claims for genuine R&D.

As the efficacy of this HMRC compliance campaign is measured and understood – and the policy landscape for innovation continues to undergo a period of change and uncertainty – it will be interesting to note whether the number of new applicants continues to decline. It is not clear whether this is the outcome policymakers responsible for the design of the incentive are hoping for.

The future of subcontracted R&D

As part of the consultation into how a merged scheme for R&D tax relief might function, the government is looking at options for how subcontracted R&D should be treated. The draft legislation points towards the adoption of the current SME scheme approach, which would see the principal gain the right to claim the cost of outsourcing R&D to a subcontractor.

Whilst there is still a need to resolve the current uncertainty regarding when R&D is contracted out (as compared to when R&D activity is incidental as part of a normal commercial contract), ensuring relief is awarded to the R&D decision-maker should best influence beneficial behaviour. Of concern is the impact of this change on current R&D subcontractors.

The statistics for 2021 to 2022 show that 79% of all SMEs claiming under RDEC are within the sectors of manufacturing, information and communication, and professional, scientific & technical. These 5,000 companies will include some whose R&D is grant funded as well as R&D subcontractors. However, the data suggests that if the government were to choose this route, four out of five of SME contractors losing the right to claim for their subcontracted activity would come from the UK’s most R&D intensive sectors.

Before any decision is reached, the impact of this point on investment in R&D should be investigated prior to implementation through consultation with those businesses affected.

We can only see the sectors these businesses sit within, and we cannot differentiate between subsidised R&D and the R&D subcontractors affected by this measure. But HMRC can, as each of these businesses will have separately disclosed their subsidised and/or subcontracted R&D expenditure in their tax return submission. The CT600L was designed to give HMRC better data to use, and this would be an excellent opportunity to use it.

What next for R&D tax relief?

The latest HMRC R&D tax credit statistics for 2023 provide a mixed but ultimately hopeful outlook for the state of innovation in the UK. The rebound in R&D tax relief claims is a positive sign, demonstrating the resilience of businesses in the face of adversity.

However, the path ahead is not without challenges. The need for clarity and accuracy in assessing the impact of error and fraud in the incentive scheme is paramount. Striking a balance between curbing misuse and nurturing genuine innovation is a delicate task that requires careful consideration.

One of the main challenges for innovative companies accessing relief has been the piecemeal change that the incentive has endured in recent years.

In the Autumn Statement 2022, significant changes to R&D tax relief for SMEs were introduced. The additional deduction dropped from 130% to 86%, with the credit decreasing from 14.5% to 10% of surrenderable losses (now capped at 186% of qualifying expenditure). However, Spring Budget 2023 introduced an exception for R&D-intensive SMEs, enabling them to maintain a 14.5% credit if they spend at least 40% of their total expenditure on qualifying R&D.

For profitable SMEs, the maximum benefit decreased from 24.7% to 21.5%, for loss-making SMEs it dropped to 18.6%, and for loss-making R&D-intensive SMEs, it lowered to 27%.

Additionally, the gross RDEC rate increased from 13% to 20%, providing greater benefits. This is especially true for main rate taxpayers, with the net benefit of claiming increasing from 10.53% to 15%. Other changes include the return to the days of marginal and small profit Corporation Tax rates as well as full expensing for capital allowances.

For accounting periods beginning on or after 1 April 2023, new qualifying expenditures for data licenses and cloud computing were introduced, and pure mathematics was added as a qualifying activity. Moreover, businesses are now required to pre-notify HMRC if they intend to make an R&D claim. There is a notification deadline set six months after the accounting period ends, except for those who’ve submitted claims in the previous three years.

Also, from 8 August 2023, HMRC requires additional information for R&D tax relief claims, such as project descriptions and more detailed cost breakdowns.

Furthermore, the government is currently considering proposals for a merged incentive that brings together the SME and RDEC schemes. The goal being to streamline and improve the process for claiming R&D tax credits in the UK.

All these changes require significant attention from innovative businesses as they adapt to the changing landscape for R&D tax relief.