Key Trends in UK Businesses

The 2024 HMRC report on R&D tax credits highlights key trends in innovation within UK businesses. R&D expenditure rose modestly by 4% in 2022-2023 to £46.7 billion, accompanied by a slight increase in total tax relief claimed. However, the number of claims dropped sharply by 21%, driven by fewer smaller claims, while the average claim value increased by 28%, reflecting a shift towards larger claims.

A Decline in Claims

This decline in claims correlates with HMRC's compliance measures aimed at ensuring claims represent genuine R&D. Sectors with questionable eligibility, such as Education and Wholesale & Retail, have seen fewer claims, demonstrating the effectiveness of these efforts. However, first-time claimants fell by 18%, raising concerns that smaller businesses and startups may be struggling with the process as administrative demands deter those with more limited resources.

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The Additional Information Form (AIF), introduced in August 2023, likely intensified this trend. By requiring detailed project descriptions, the AIF appears to favour larger claims, potentially disadvantaging smaller businesses (particularly those claiming under £250,000).

Geographical Disparities

Geographical disparities persist, with London dominating claims (23% of total claims and 32% of the total amount), followed by the South East and East of England. Despite a national rise in R&D spending, regions like the North East and Yorkshire and the Humber experienced significant declines, highlighting concentrated innovation hubs.

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Information & Communication, Professional, Scientific & Technical, and Manufacturing lead the way for sectors represented, accounting for 70% of the total relief claimed. Information & Communication grew by 6%, Professional, Scientific & Technical by 22%, while Manufacturing remained stable. Perhaps unsurprisingly, sectors such as Wholesale & Retail and Accommodation & Food saw sharp declines, reflecting compliance measures and shifts in R&D activity.

Looking Ahead

Looking ahead, HMRC's compliance focus and the impact of the AIF will likely continue shaping the claims landscape. Simplifying the process and raising awareness, particularly among SMEs, could ensure that these key drivers of innovation remain engaged and supported.