HMRC R&D tax credit statistics 2024 – what you need to know

A targeted approach to compliance is working

In the context of ongoing efforts to crackdown on error and fraud in R&D tax relief, the latest statistics offer some encouragement for HMRC. The number of claims, particularly those at the lower end of the scale in terms of value, has declined without impacting overall expenditure on R&D and the benefit to businesses. Similarly, we’ve seen a drastic drop in claims in sectors where HMRC has been explicit that claims are rarely likely to be eligible. 

While it may seem counter-intuitive to view a reduction in the number of businesses benefiting from R&D tax relief as a good thing, we recognise that spurious claims were a problem that needed tackling. The concentration of this reduction in lower claim value bands suggests that some more speculative claims are being discouraged. With total relief claimed remaining roughly in line with the previous year, this suggests those companies continuing to access the incentive are making larger claims, with average claim values 28% up on the previous year. 

However, a note of caution is merited when we turn to first-time claimants, which were down 18% against the previous financial year. It’s important that barriers to claiming do not become insurmountable for start-ups and scale-ups, which can be hotbeds of innovation and free of the structures which can sometimes stifle new ideas in larger organisations (as explored by recent research by the International Monetary Fund).

The Additional Information Form is having an impact

Although only introduced in August 2023, the mandatory requirement to submit an Additional Information Form (AIF) applies to all claims submitted from that point and its impact is already evident in the statistics. There has been a drop in the number of claims below £250,000 and an increase in claims above this value. 

As its name implies, the AIF requires additional information to be provided when submitting a claim, with the number of project descriptions required now mandated. Although much of this was already being disclosed by diligent agents, businesses submitting claims without support – likely to include a higher proportion of spurious claims – will have been hit, and smaller businesses and first-time applicants discouraged from claiming as the smallest claims become less commercially viable. While this increased administrative burden should weigh proportionately less heavily on large companies, there could still be an effect at the margins. For instance, group companies may choose to concentrate their efforts on preparing claims for entities with the largest R&D projects, judging smaller claims not to be worth the resources required and the potential risk of enquiry.

It will be interesting to monitor whether this skew to larger, more established innovators becomes a permanent feature in future statistics. There’s a danger that the AIF creates a de facto minimum claim value which deters first time applicants, effectively turning off the tap for a vital element of funding for innovative SMEs.

SIC notes, continued

Last year, we took a deep dive into the data on Standard Industry Classification (SIC) codes. Revisiting this topic in this year’s statistics, it’s clear that HMRC’s more targeted approach is working.  

Not only is the bulk of R&D tax relief benefiting businesses in three sectors synonymous with innovation (Professional Scientific & Technical, Information & Communication, and Manufacturing) but sectors identified by HMRC as rarely eligible have also seen a stark decline, including Education and Wholesale & Retail Trade, Repairs. 

We know that HMRC has been targeting these sectors for enquiries and this is clearly having a deterrent effect.

Patent Box remains a best kept secret

The number of companies electing into Patent Box was slightly down, although it’s worth remembering these are provisional statistics. We’d expect the number to nudge up to around or slightly above the previous year’s total once all claim data is accounted for. However, it’s fair to say that awareness remains low – 1,600 claims pales in comparison to more than 65,000 for R&D tax relief. We surveyed businesses on their top tax priorities and fewer than 4% chose maintaining Patent Box despite 37% saying they would like to see lower Corporation Tax rates for profits related to R&D – precisely what Patent Box provides. 

On a more positive note, the value of relief to companies has increased, but the lion’s share (94%) is still going to large organisations. This suggests that misconceptions remain about who is eligible. This is a problem that needs to be addressed if we want Patent Box to make a real difference to innovative businesses. 

Next year will be the acid test of whether the message is getting through. Not only will Patent Box become more valuable as a result of the Corporation Tax rise in April 2023 (making the 10% rate on IP profits even more attractive by comparison), but we should see the increased R&D expenditure in this year’s data flow through to profits from patented IP.

Find out more about claiming Patent Box tax relief.