Survey Reveals Low Uptake Of UK R And D Tax Credit

by Robert Lee, Tax-News.com, London

13 July 2006

A survey by the business advisory firm Deloitte has found a surprisingly low uptake of the UK government's research and development tax credit, particularly by small- and medium-sized companies which, ironically, stand to benefit the most from the system.

The survey of 560 companies conducted in March 2006 found that the majority of firms developing new products, processes, materials and services were not taking advantage of the credit. Nationally, more than half (55%) of potentially eligible companies had not put in a claim for the credit.

The R&D tax credit allows small and medium-sized companies to claim a 50% deduction on qualifying R&D expenditure, and large firms to claim a 25% deduction.

The survey found that mainly small firms were missing out. Of the companies that had not claimed the R&D credit, 83% had less than fifty technical staff on the payroll. "Arguably, this is exactly the demographic which should be benefiting from the credit," Deloitte noted in its report.

The main reason given for not claiming the credit was that companies intended to claim, but had not yet done so. However, a lack of information about the the credit was a major factor; almost one quarter of the respondents were not even aware that the R&D tax credit exists, highlighting a failure on the part of HM Revenue & Customs to properly publicise the system. There was also a perception that the credit was difficult to claim.

The survey additionally revealed pronounced regional variations in the uptake of the R&D credit, with firms in the Midlands seemingly the most unaware of the benefits of the credit. Here, only one in ten eligible companies are applying for the credit. In contrast, in the north east and south west of England, one in three were attempting to claim the credit, while in Scotland and the south east of england, about half of eligible firms were making claims.

The UK government has set itself the ambitious target of increasing R&D spend as a percentage of GDP to 2.5% by 2014, up from 1.9% in 2004. However, Deloitte says that there will need to be a "major boost" in R&D spending in the remaining eight years if this is to be achieved, and noted that its survey showed there "is clearly room for much improvement" in the R&D credit system.

Deloitte concluded that companies nationwide are "clearly missing out on significant tax breaks...primarily through their basic lack of knowledge of the R&D relief available."

While the government was praised for amending the claim process in the last two budgets, Deloitte said that further simplification and/or expansion of the relief will be required if the government is to meet its own "challenging" R&D spend targets by 2014.

Recommended