What recent R&D tax credits trends mean for businesses

What’s included in the ONS R&D tax credits data?

Each year the ONS provides an overview of the R&D tax credit scheme’s performance, a particularly useful source of benchmarking information for applicants considering the scheme for the first time. The publication includes data about the cost of support claimed, and the R&D expenditure used to claim. Moreover, the report breaks down the number of claims per region, industry, and cost band. 

As the data provided is complex, we’ll summarise the key points for you. 

London receiving lion’s share of money despite government efforts to equalise wealth

As most of you will be aware, there’s a drive at the moment to even out wealth distribution across the country. We looked at a five year average for the proportion of claims and the allocated cost for each UK region. 

Unsurprisingly this data shows that London, the East of England and the South of England are the only regions that repeatedly receive more money than the rest of the UK. For example, London receives up to 10% more money in proportion to its number of claims. On the other hand, the North West and Yorkshire and The Humber receive approximately 4% and 3% less money than their number of claims respectively. This five year average represents an ongoing trend of regional bias towards the ‘Golden Triangle’.

And looking at year on year trends, it’s clear this disparity is increasing. Scotland and the North East are showing a decrease in terms of the proportion of claims submitted and benefit received. This could be driven by increasing salaries in the ‘Golden Triangle’ area with R&D staff more in demand for driving up claim values. But it does suggest the R&D claim scheme mirrors the investment in innovation rather than changing behaviour to encourage new investment in under-represented areas of the UK.

Regional grants provide opportunity to rebalance

Following the latest government spending review, it seems more investment in innovation will move towards competitive grants. This means companies need to become aware of schemes such as Innovate UK to future proof their innovation incentives. Moreover, it’s clear grants and other regional incentives are going to play a bigger role in rebalancing the UK economy by region. If you’re unfamiliar with the grant schemes, contact us to find out what is available and receive regular updates of the latest grants.

Looking to the future, with the COVID-19 pandemic and more interest in flexible working, we wonder if this may change the regional balance. As more and more companies slim down their central offices, we could see a surge in the number of R&D workers undertaking skilled jobs outside traditional city locations. It’ll be interesting to see how the scheme develops if working practices change.

Don't assume your sector's activities don't qualify

Overall, the ONS data suggest a fairly broad distribution of qualifying expenditure across all sectors. This resonates with what we see in our work: there are claims across all sectors, but we also see that many businesses are missing out by assuming their industry doesn’t undertake qualifying R&D activities. 

As can be seen in the graph below, the two industries with the highest return are Manufacturing and Information & Communication. There are a large number of claims under Professional, Scientific and Technical, but this is a broad umbrella covering a range of industries including architecture, consulting engineering and research centres. However, the ONS data is starting to show some differing trends over time.

R&D scheme failing to support more established industries

The Manufacturing sector has suffered the largest variation in performance when compared to other sectors. Since 2014, it experienced a 5% drop in the value of allocated cost. On the contrary, Information & Communication and Professional, Scientific & Technical sectors have shown a slight increase in benefit for the same period. This again suggests R&D tax credits are following investment rather than supporting a rebalancing of the economy. 

We can think of two reasons why these changes may be happening, but it’s likely the drivers are complex. Firstly, Manufacturing is focused on the regions where we don’t see growth in R&D claims. As such, the scheme doesn’t stimulate innovation in the regions where older industries operate, and lacks the flexibility to focus incentives by sector. Secondly, there could well have been more investment in IT R&D claims compared to Manufacturing due to an overall change in business and market needs since the start of COVID-19 pandemic. Nevertheless, as a result our home grown manufacturing businesses will struggle to keep up while overseas competitors are investing faster.   

Both are worrying changes. We recommend companies in these sectors look to make sure they are making best use of the R&D incentives available from the UK government. We still find businesses that are unaware of the scheme, which, set against the upward trend in claims, shows they are clearly missing out. Additionally we recommend these businesses also look more broadly at grants and other incentives available, which may assist in making a major business decision to invest in innovation or new technology. 

Claim to keep up with your competitors

We’ve highlighted some interesting variations showing the wealth in certain parts of the country that’s linked with the variations in innovation spend. The R&D tax credit scheme appears to be reinforcing structural issues in the UK economy, with grants and regional investment possibly being the only routes available to address these issues. 

The manufacturing sector is starting the lag behind in the amount of benefit derived from R&D tax credits. Again this is a worrying trend, and could leave businesses playing catch up with overseas competitors in the near future. 

Nonetheless, the ONS data shows businesses across the country and different sectors are benefiting from support. Even with the rapid increase in claimants that we’ve seen over the last few years, we’re still surprised to find many businesses are unaware of the scheme or don’t feel they can claim.

Speak to an expert

If you would like a free review to see whether your business could be benefiting from R&D tax credits, then please get in contact via the form below.