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HMRC’s statistics for R&D and Patent Box tax relief – GovGrant commentary

The latest statistics showing the value of R&D tax relief and Patent Box were published by HMRC yesterday. What does an initial look at this year’s numbers tell us?

The highest yearly figure for R&D tax relief

The total value of R&D tax relief for 2019-2020 is now projected to be nearly £7.5bn. It’s a very large number by any measure. We are supportive of any challenge to make sure that this public money is spent wisely and welcome greater scrutiny of the scheme. It’s fantastic news that the number is increasing year on year but only if it translates into spillover value and additionality. However, my question remains that if R&D activity is on the rise, why are we not seeing a similar rise in the use of Patent Box?

How does the R&D link to through to the Patent Box scheme

I feel concerned about the stark contrast in value and uptake between the R&D and Patent Box schemes. HMRC recently consulted into the issue of abuse of R&D tax and has tried to link an intellectual property (IP) element to the qualifying criteria. Seeing R&D, which has qualified for tax relief, turn into IP and resulting in Patents and Patent Box should be seen as critical to ensure long-term compliance and payback on the government’s investment.

I fear Patent Box is being forgotten. This should be considered as the same pot of incentives but the definitions between the schemes are inconsistent, making it difficult to view them holistically. For example, the definition of a large business is different for Patent Box and RDEC. We need to pull these incentives together and ensure that they work in tandem, otherwise, we risk poor investment in the industrial strategy

SME claims – the highs and lows

It feels significant that there is an increase in large claims through the SME scheme, for claims over £500k, increase from 700 to 1,055 claims and £835m £1.255bn in support. At the other end of the spectrum, and perhaps to be expected, it’s great to see continued traction with small claims under £25k. However, this could be one to watch if we are to ensure the integrity of the scheme. Poor compliance shouldn’t be allowed to sneak through just because of smaller claim values.

How long does it take start-ups to claim R&D tax relief?

Also in considering the number of first-time claimants on the SME scheme, I’m interested to know how this aligns with expectations, based on the number of new start-ups in the same period. At what stage do businesses start claiming R&D tax credits – from day one or after the first few years? I’ll be looking into this to make sure that start-ups are getting the message and are benefiting fully from the R&D they undertake. So often we see R&D tracking as an afterthought because it’s potentially perceived as just a ‘tax thing’. Treating R&D tax relief as an afterthought can also be detrimental to the recognition and valuing of IP.

What the stats tell us about outsourcing overseas

SME claims under the RDEC scheme are still relatively modest yet at the same time, the statistics suggest as much as £7bn of R&D expenditure from UK companies goes overseas. This acceleration compared to the BERD forecast which excludes overseas costs does pose a question – is a UK skills shortage forcing companies to outsource their R&D overseas and creating long-term damage to the innovation ecosystem?

If that £7bn that is already subsidised through the scheme, funded by taxpayers but is not creating UK value then now is the time to question how the UK addresses this and utilises the wealth of expertise most likely on our doorstep.

Read our full commentary on the stats here.

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