There has been a big increase in the amount of money that Welsh businesses have claimed in tax credits for research and development activities.
UK businesses can claim tax credits for R&D projects that involved challenges of a technological or scientific nature that were difficult to overcome.
The work doesn’t have to have a successful outcome, and the tax credits cover a variety of costs, including staff, materials and software, that were directly related to the project. Companies can claim a reduction in their tax or, if they have no tax liability, receive a cash payment.
According to new data released by HM Revenue and Customs (HMRC), the total value of claims for R&D tax credits in Wales jumped from £70m in the 2016-17 tax year to £95m in 2017-18, a rise of 35.7%.
The number of claims also increased from 1,245 to 1,530 over the same period, a smaller rise of 22.8%.
It’s not all good news though, because the figures also show that businesses in Wales are being out-performed by those in other parts of the UK when it comes to claiming tax back for R&D work. Wales only accounts for 3.15% of UK claims.
There could be a number of reasons for this, but one might be a lack of awareness or confusion about whether their businesses will qualify for tax credits.
Although the research has to be of a scientific or technological nature, this doesn’t mean companies have to be working in a science or technology field to qualify for tax credits. The HMRC figures show claims accepted from businesses in a wide range sectors including agriculture, mining, construction, fishing and transport to name but a few.
The HMRC data allows us to draw some conclusions about the sort of companies that claim R&D tax credits, with young SME companies in the manufacturing, information and scientific sectors being prominent.
The number of claims rose across the board, but three sectors still account for more than two-thirds (68.4%) of claims – manufacturing, information and communication, and professional, scientific and technical (UK-wide figures).
There was a particularly large increase in claims in the professional, scientific and technical sector, a rise of 24% between 2016-17 and 2017-18.
Companies can claim R&D tax credits under different schemes according to their size, with small and medium-sized enterprises (SMEs) able to claim a higher rate of relief than large companies.
The overwhelming majority (88%) of Welsh claims came from SMEs, with the average claim from an SME in Wales being £51,000 and from a large company £139,000. This compares to £46,000 and £121,000 in 2016-17. Young companies up to 10 years old are responsible for more than 40% of all claims.
There was also a big jump in the number of first-time UK applications, from 6,975 in 2016-17 to 8,020 in 2017-18. The increase has come entirely from SMEs, with the number of first-time claims from large companies actually falling slightly, perhaps as a result of fewer companies moving from the SME scheme to the RDEC (Research and Development Expenditure Credits) scheme for larger businesses.
The largest number of claims came in the lowest cost bands (up to £5,000 and £5,000 to £10,000), indicating how many of the smallest companies are taking advantage of the scheme. There was also a large number in the £50,000-£100,000 band, where the average UK SME claim size lies.
Notes: The figures for 2016-17 are unrevised, in order to allow a like-for-like comparison with 2017-18 to be made.