There has been a marked fall in the number of SMEs in London making research & development tax relief (R&D) claims, according to research by UK top 10 accountancy and advisory firm Azets.
The drop has prompted a specialist at the firm to warn that local businesses should use the valuable tax relief support – or lose it.
Heather Williams, a tax partner with UK top 10 accountancy and advisory firm Azets, covering the South and South East, issued the warning after analysing latest HMRC figures for 2023-24, with the previous year’s data in brackets for comparison.
London had 8,900 claims [12,060], with a total cost of £1,025m [£1,475m]. Inner London – East had 2,800 [3,675], Inner London – West 3,990 [5,145], Outer London – East and North East 530 [860], Outer London – South 460 [745] and Outer London – West and North West 1,130 [1,635].
Information & communication led with 4,050 claims [4,925], followed by professional, scientific & technical at 1,590 [2,010] and manufacturing at 760 [1,060].
South East England had 5,380 claims [7,830] with a total expenditure of £490m [£695m]. Berkshire, Buckinghamshire and Oxfordshire had 1,840 [2,550], Hampshire and the Isle of Wight 1,065 [1,515], Kent 850 [1,315], and Surrey, East Sussex and West Sussex 1,630 [2,445].
Information & communication led with 1,540 claims [2,100], followed by manufacturing at 1,240 [1,700] and professional, scientific & technical at 1,065 [1,420].
Azets has its London base at London Bridge.
Heather, South regional Head of R&D for Azets, said: “We are finding that the reducing benefit for SMEs, latest compliance rules and relatively high time and cost investment to make an R&D claim is discouraging SMEs, in particular smaller SMEs.
“The decrease is concerning because the funding helps encourage businesses to develop new technologies which in turn benefit the regional economy.
“Innovation costs are considerable, yet successful innovation, whether a new product, service or process, can generate new revenues and additional tax which then offset the relief. Companies with genuine claims should not be put off.”
Claims by SMEs – which account for nearly 99% of businesses in the UK – fell by nearly one-third compared to the previous tax year.
Just under 47,000 R&D tax credit claims for 2023-24 were made overall, a fall of just over a quarter.
Tax reliefs can be between £15 to £27 for every £100 spent on R&D, based on the government’s own figures.
Heather added: “The decrease, seen locally and across all the regions, is a crying shame because this kind of funding pays the people that help local businesses develop new and exciting technologies which in turn grow the regional and wider economy.
“Innovation costs considerable money – and a lot of innovation wouldn’t happen without taxpayer support because loss-making companies wouldn’t risk bankrolling further financial hits and profitable ones may fear being dragged into the red without recourse to public money to offset R&D outlay.
“Yet successful innovation can generate new revenues for businesses and create new taxes which more than cover what was put in by the taxpayer. Companies with genuine claims should not be put off.
“Worryingly, the government’s figures show that SMEs aren’t making as many R&D tax credit claims, with a decrease of nearly one-third compared to the previous year, and this is undoubtedly a direct consequence of the latest compliance rules. Indeed, the number of claims last year for R&D tax credits by scheme overall was the lowest since 2016-17.”
The amount of tax relief claimed through the SME scheme in the UK fell by 29%, compared with the previous year, to £3.15 billion.
In comparison, claims for the larger companies’ RDEC scheme fell by 5%, although the amount of relief claimed rose by 36% to £4.41 billion.
According to HMRC, the provisional estimated amount of total R&D tax relief support claimed for 2023-24 was £7.6 billion, a decrease of 2% from the previous year and corresponding to £46.1 billion of R&D expenditure, which was 1% lower.
Regional allocation is based on the postcode of the company’s registered address, which might not correspond to where the R&D activity takes place.
HMRC states that it has included estimates for claims not yet received, with revisions expected in next year’s publication.
The information & communication, manufacturing and professional, scientific & technical sectors account for the greatest volume of claims, making up 72% of total claims and 71% of the total amount claimed.
Earlier this year Azets sent a wish-list to the Chancellor about making the application process less fraught with difficulty following a tightening up on bogus claims.
On behalf of the Chancellor, the then-Exchequer Secretary to the Treasury James Murray MP responded, stating that the government is “committed to periodically evaluating the R&D reliefs to ensure they are as effective as possible and underpinned by a credible, up-to-date evidence base”.
The reply included that the government “recognises the important role that R&D plays in driving innovation and economic growth as well as the benefits it can bring for society”.
It was “committed to maintaining the generosity of the rates in both the merged R&D Expenditure Credit scheme and the Enhanced Support for R&D Intensive SMEs”.
The government stated that each £1 of public R&D stimulates between £0.41 and £0.74 of private R&D within the same year, and between £1.96 and £2.34 of private R&D over time.
In Azets’ letter to the Chancellor, attention was drawn to flaws in the application system which caused some successful claimants to pay back tax relief more than a year later – after the money had been spent on wages, prototypes and vital materials.
Azets urged the government to “listen” because the “current advanced assurance system is not working”.
Mr Murray responded: “Merging the SME and RDEC schemes has simplified the system as there is now a single set of qualifying rules for the vast majority of R&D claimants. The enhanced support for R&D-intensive SMEs shares many of the merged scheme’s rules, albeit with a different rate mechanism. The Government will continue to consider longer term simplifications and improvements to the effectiveness of the reliefs.”
