HMRC have published three reports evaluating the effectiveness of the two R&D tax relief schemes and the Patent Box relief.
This is part of a general move to evaluate the benefits of various different forms of tax relief. Whilst the effectiveness of the SME R&D scheme has been reviewed regularly in previous years, this was the first time that either RDEC or Patent Box had been considered.
R&D tax relief
The aim of both R&D schemes is to encourage R&D investment in the UK by incentivising R&D expenditure. This in turn increases productivity and ultimately economic growth.
In 2018 R&D expenditure in the UK was the equivalent to 1.71% of GDP, an increase from 1.67%. The UK Industrial Strategy has a stated aim of increasing this figure to 2.4% by 2027 and R&D tax relief is one way in which various UK governments have sought to encourage R&D investment.
SME R&D scheme
The report into the SME scheme considers the impact of the relief and the extent to which the relief is proportional and appropriate.
It concluded that for every £1 spent on this relief, between £0.75 and £1.28 of additional R&D spend was generated. This additionality ratio reduces to between £0.60 and £1 for loss making SMEs who are claiming cash credits from HMRC, as the rate of relief is smaller in these circumstances. This ratio is reducing slightly from previous periods.
RDEC scheme
The RDEC scheme has in recent years replaced the Large R&D relief scheme for larger companies and certain SMEs operating as sub-contractors or in receipt of grant funding. As the relief only came fully into effect in 2016, this is the first time the relief has been fully evaluated.
The additionality ratio for this relief is significantly higher than for the SME scheme, with every £1 of R&D tax relief cost generating between £2.40 to £2.70 of additional R&D spend. This is a slight increase on the ratio for the last year of the Large company scheme, which was £2.35.
The cost of the RDEC scheme in 2017/2018 was £2.4bn, which on the additionality ratios quoted indicates that the R&D relief led to an investment of between £5.5 and £6.5bn in R&D expenditure.
Patent Box
The UK patent box was introduced in 2013 with the aim of retaining and commercialising Intellectual Property (IP) assets in the UK. This results in the UK economy benefitting from the activities associated with that commercialisation.
The incentive is a reduction in corporation tax payable on profits derived from qualifying IP. This first evaluation indicates that there is a 10% increase in assets held in the UK by firms who take advantage of the Patent Box as compared to those who do not. In addition to this it is thought that there will be other, non-direct benefits to the economy as a whole.
Since their introduction, successive governments have supported innovation tax reliefs and these reports demonstrate the continued effectiveness of the reliefs on the overall economy. Despite increasing uptake, the government believes that more companies could be claiming and we would encourage any business who feels they may be eligible to speak with one of our advisers.
If you would like any more information, please get in touch with your usual Radius contact or a member of the Radius team on 0114 2671617 and let us show you how easy it is to make your innovation pay.
Related links
- Radius case study - see how we claimed R&D Tax Reliefs for Abbeydale Brewery Limited
- Download our guide to making a successful R&D tax relief claim
- Visit our resource library for more guides
- Webinar recording - tax saving ideas for business owners and individuals
- R&D Tax Relief
