R&D tax relief encourages investment in research and development across the economy, according to a recently published study by the London School of Economics (LSE). Researchers from the LSE’s Centre for Economic Performance (CEP) noted that a downward trend in UK business enterprise R&D had levelled off in the mid-2000s. They also noted a change in government policy on R&D tax relief in 2008. This extended the more generous R&D tax relief scheme for small and medium-sized enterprises (SMEs) to firms with assets above €43 million (the original limit) to those with assets up to €86 million.

Using statistical methods, the researchers examined whether the growth in R&D spending was related to this policy change. The researchers recognised that an increase in R&D tax relief claims might simply reflect changes in the way businesses reporting their activities, classifying more as R&D than they had done before. Therefore, the researchers also looked at another indicator of business innovation, and examined the number and quality of new patent applications in the same period, and noted a corresponding growth.

The researchers concluded that the UK government’s more generous definition of SMEs for R&D tax relief purposes did indeed contribute to an increase in business innovation. Furthermore, the researchers estimated that every £1.00 of tax relief allowed generated at least £1.70 in R&D. They concluded that R&D tax relief in the UK is a worthwhile policy that stimulates innovation and growth, and should be maintained.

HM Revenue and Customs have published the latest statistics for R&D Tax Credits for the 2014-15 financial year. Once again there has been an overall increase in the number of tax relief claims submitted, as well as in the overall total amount of relief claimed. The total number of claims in the 2014-15 period was 22,445 compared to 18,720 in 2013-14, and 15,700 in 2012-13. In particular the number of claims under the Small and Medium Enterprise (SME) scheme increased from 16,005 in 2013-14 to 18,630 in 2014-15, an increase of 16 per cent. HMRC reports that there was a decrease of 38 per cent in the number of claims under the large company scheme, due to the expected switch over to the new Research and Development Expenditure Credit (RDEC) scheme for larger enterprises. Claims under the RDEC scheme itself rose from £940 million in 2103-14 to £1.1 billion in 2014-15.

As in previous years, the industry sectors with the largest number of claims were ‘Manufacturing’, ‘Professional, Scientific, and Technical’, and ‘Information and Communication’, and the regions with the most claims were once again London, the South East and the East of England. The total amount claimed in 2015-16 was over £2.45 billion, a rise of 38 per cent compared to the previous year, meaning that since the scheme was introduced in 2001, there have been over 141,000 claims with a cumulative value of £14 billion.

R&D Tax Credits are a powerful way of supporting innovation in the UK economy and are extremely beneficial to companies of all sizes, particularly smaller enterprises, where cash flow can be a critical issue. R&D Tax Credits can help companies grow and can boost employment in the economy. The continuing increase in the number and value of R&D Tax Credit claims is a welcome development, but we believe that there are still thousands of companies that aren’t claiming what they are entitled to, mainly because they are not well-informed about the scheme. It’s our mission to reach out to those companies and help them benefit from this valuable government incentive.

Many UK businesses in the UK may be missing out on significant reductions in their Corporation Tax liabilities by not claiming the additional Corporation Tax relief they are entitled to for Research and Development. But is it possible to know just how many businesses there are that could be claiming R&D tax relief but aren’t doing so? While we can’t put an exact figure on this we thought we might look at two different sets of official statistics and try to make some sort of estimate.

HMRC publishes statistics on the number of R&D tax relief claims it processes. For 2013-14, the last year for which figures are available, the total number of claims for all the R&D tax relief schemes was 20,100. (The full statistical report is available on the HMRC website.) Is 20,000 a high or low number compared the number of businesses that could be claiming R&D tax relief? To know that we have to find out how many businesses there are in the UK, and luckily, the Department for Business Innovation & Skills (BIS) does have statistics on the number of businesses in the UK.

The BIS figures show that there were 4.9 million private businesses in the UK at the start of 2013. However, more than 75 per cent of businesses didn’t have any employees other than the owner, and it’s highly unlikely that a single-person business would be undertaking any research and development projects. This leaves us with approximately 1.1 million businesses that do have employees.

Clearly, many of these businesses are in the services sector, but there must be some proportion of these 1.1million businesses that could be eligible for R&D Tax Credits. Our guess is that perhaps 10 per cent of businesses with employees, or 110,000 businesses, could be eligible. In that case, if only 20,000 claims are processed each year there could be something like 90,000 businesses in the UK that are eligible to claim R&D Tax Relief but are not doing so.

See also: Why aren’t SMEs taking advantage of R&D tax breaks?