R&D Qualifying Expenditure vs Claims for Top Sectors | Green Jellyfish
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R&D Qualifying Expenditure vs Claims for Top Sectors

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The R&D Tax Credits Scheme is designed to reward businesses that have invested in qualifying activities, it is a scheme that is created for limited companies only, with an aim to leverage UK businesses into the top of the world of innovation.  Certain sectors claim more than others. The reason for this is because, in certain industries, R&D is at the core of their business models. Therefore, these industries heavily rely on it for increased quarterly revenue and overall survival against their competitors.

When it comes to weighing up the success of the R&D Tax Credits scheme, it can be easy to get the overall UK investment confused with the number of businesses who are claiming the benefit, so we have compiled this report. 

Below is a list of the top 5 most common industries that claim R&D tax credits. 

The Top 5 Sectors Claiming R&D Tax Credits

Manufacturing 

No. of Claims – 18,995 (Research and Development HMRC Tax Credits Stats 2021)

It is universally known that the manufacturing industry is the highest claiming R&D tax credit sector. In fact, 1 in every 4 submitted claims derives from this sector alone. This should come as no surprise because despite manufacturing being one of the largest sectors in the UK, it is the largest contributor to the national GDP.

As mentioned prior, this is one of the industries that heavily relies on functional R&D innovations as businesses seek to come up with new products and processes to improve their productive efficiency. Not only this but regulations are constantly changing, so qualifying R&D work can also be used to ensure that the business is compliant with industry regulatory standards. 

(IT & Software) Information & Communication Technology (ICT)

No. of Claims – 19,000 (Research and Development HMRC Tax Credits Stats 2021)

Simply looking back at how technology has changed in the past two decades (alone) can give you a rough idea of how integral R&D has been to this industry. At the heart of the technological change has been the I.T and software sector, it’s almost as broad as manufacturing with different branches of software development, software publishing and marketing analytics making up the industry as we know it today. The UK Government’s definition of R&D (for tax purposes) is a very broad one, with a criterion that treads along the lines of – any company with a scientific element to their activity. 

(Engineering) Professional, Scientific, and Technical

No. of Claims – 16,650 (Research and Development HMRC Tax Credits Stats 2021)

As we touched on briefly in the previous sector, the UK Government’s definition of R&D is a broad one with a heavy emphasis on scientific elements. Engineering relies on the exact fundamentals of what R&D is and every company in this industry operates with a scientific element to their activity, therefore they are very likely to be engaged in qualifying experimentation and testing.

Many engineers have to think outside the box to overcome problems with innovative solutions. Despite the number of claims being less compared to the previous industries, the value of those claims are a lot higher. There needs to be more awareness generated around the industry so more firms can claim back their R&D costs. 

(Retail) Wholesale & Retail Trade, Repairs

No. of Claims – 9,505 (Research and Development HMRC Tax Credits Stats 2021)

By retailers, we’re not only talking about the fashion stores but the likes of wholesalers who sell equipment for specific industries such as agriculture and manufacturing, as well as repair retailers who focus on technical machinery and technological restoration. Unlike the top 3 sectors, this is an industry where qualifying for R&D tax credits is a little more tricky due to the lack of innovative business models amongst the competition.

It’s evident from the number of claims alone but with the increase of e-commerce and online shopping, some businesses have found innovative ways to adjust in processing sales and customer enquiries. One of the ways this qualifies as R&D (in the tax credit guidelines) is through the use of streamlining or automation of their business operations, where adjusting to the digitalisation of sales can be included as such. 

(Administration) Administrative and Support Services

No. of claims – 5,125 (Research and Development HMRC Tax Credits Stats 2021)

What we mean by the administration sector is the inclusion of support services such as ‘call centres’, HR and recruitment and rental companies. With technology rapidly changing, these roles will require updated software to their systems in order to get the work done efficiently. Most of the services have recently been using the cloud when undergoing administrative tasks requiring collaboration with fellow colleagues. This has helped influence positive changes to companies (using the software) as they have aided in overcoming obstacles like integration through the use of innovation. 

Although these are the top 5 most common industries to have claimed R&D tax credits, there are lots more sectors that are eligible to claim. In fact, any industry can claim R&D tax credits, as long as they have qualifying expenditure that HMRC deems as eligible.

The Top 5 Industries Investing In R&D

The top industries investing in R&D include lawyers, accountants, and vets with many industries that are not traditionally expected to spend a lot of money on R&D surprising us all. Many firms across the UK have flourished in terms of investing in R&D, with many overcoming challenges posed by the Covid-19 Pandemic. 

The total amount spent on R&D was £38.5 billion which is the equivalent of 1.74% of total expenditure, showing a steady rise from £20.4 billion in 1986 to £38.5 billion in 2019, a total increase of 96%. 

Manufacturing

The Manufacturing industry spent a total of £15.3 billion on R&D in 2020, a notable increase from £14.6 billion in 2019. Despite the disruption caused by the Covid-19 Pandemic and fears that levels of innovation would dwindle, the Manufacturing industry pushed through suffering major disruptions, and still managed to grow it’s R&D spend on an annual basis. 

However, on the other hand in terms of the industries overall performance compared to the UK as a whole, it has been deemed as uninspiring with just an 11% growth, compared to 33% and 32% growth for other sectors, and the national average being 19%. Some examples of leading manufacturing projects are a result of the industry going through a transformation, the 4th industrial revolution which focused on the digitization and automation of traditional manufacturing and industrial practices, using modern technology. 

Design and development of new machine prototypes, working on waste reduction processes and machinery innovation, integrating complex processes into fully automated processes, material research with the aim to find new materials with better strength, weight, flexibility and resistance, and machining development to form better processes are just a few examples of projects that have been leading the industry to it’s first place in R&D spending. 

Information & Communication Technology (ICT)

The UK is one of the world’s leaders in terms of ICT markets, with it being 2nd place in the ranking of ICT spending per head, following the United States. The Information & Communication Technology sector was the 2nd biggest spender on R&D activities in 2020, paving the way for other industries to follow suit. The sector itself accounts for 5% of all UK jobs, giving so much back to the UK economy. 

There are many promising opportunities for this sector, such as supplying more SME’s and large corporations within the Financial, Manufacturing and Retail sectors with impressive technology such as cloud technologies, with most UK businesses already taking advantage of cloud services. The ICT sector covers digital goods and services, such as e-commerce, telecommunications, computer and cloud services, FinTech, AI, AR, VR and even smart cities and cyber security. There are a total of 29 industries in the UK Information and Communication sector, ranging from App Development to Satellite Telecommunications with plenty room for more in the future.

Professional, Scientific and Technical

The Professional, Scientific and Technical sector had an average claim value of £106,607, reported in the 2021 R&D Tax Credits Report. The businesses within this sector were top claimers of the UK Government’s innovation incentive: R&D Tax Credits, proving that the sector’s core purpose is innovation, with multiple qualifying projects ongoing. 

Biotech and Pharmaceutical projects are more obvious examples of qualifying businesses with innovation at the centre of their businesses. Included in the list of businesses within this sector are Architectural and Engineering businesses, Scientific Research, Advertising and Market Research and even Legal and Accounting activities.

From the development of more efficient alternative materials, product development, trials and prototyping, batch production and disruption development and new tools are just a few examples of impressive and sophisticated Professional, Scientific and Technical innovations. 

Pharmaceuticals Company: Case Study

GlaxoSmithKlein, a pharmaceuticals company, is the top company investing in R&D, spending £5.1 billion in R&D in 2020. They spend a total of 15% of their turnover, which was a 12% increase from the previous year, placing a large focus on not only improving health & safety with their innovations, but creating financial value. Their scientific focus is Pharmaceuticals and Vaccines related to the immune system, human genetics and advanced technology, aiming to use their expertise to create healthcare products that meet customer demands. 

Wholesale & Retail Trade, Repairs

Another sector with the largest amount of R&D spending were the Wholesale & Retail Trade, Repairs industries. Retail especially is requiring more innovative solutions to ever-changing consumer demands, which are proving to be a challenge to keep our high streets alive. From the loss of stores such as Debenhams to Arcadia (Topshop, Topman, Miss Selfridge etc), the implementation of new innovative ways of approaching retail are paramount. 

Responding to client demand is at the forefront of innovation projects for this sector, but client-facing projects are not all that their innovation is limited to. Developing sophisticated solutions for stock and accounts systems and streamlining or automating processes for Wholesale food, beverages, tobacco, household goods, motor vehicles, agricultural raw materials, live animals, machinery and equipment businesses are just a few ways that businesses have been leveraging themselves above competition when it comes to innovating. 

Some examples of qualifying projects for the R&D Tax Credits scheme are new stock and enterprise software implementation, automated systems for materials handling, analytics software development for online e-commerce, eco-friendly solutions, new materials such as smart fabrics, optimisation of materials making them lighter, thinner, stronger, brighter and cheaper and lastly the use of devices, mobile and tablet technology to improve efficiency. 

Construction

The UK Construction industry has increased it’s R&D spending to £351 million, which is a huge 9.7% annual increase every year. Many businesses within this sector are making use of the R&D Tax Credits scheme, rewarding these businesses for their increase in innovation. Despite the industry being in the top R&D spenders, only 1% of UK businesses are reaping the benefits of the R&D Tax Credits scheme, with room for improvement when it comes to businesses claiming back money that is rightfully theirs, rewarding them for their innovative efforts. This may be due to Construction companies not believing that they are eligible due to the nature of their work seemingly not being qualifying, but this is not correct and is costing the industry a huge amount of money every year due to underclaiming. 

The Construction related R&D projects are generally either specialised construction activities or construction of buildings, with examples such as creating or experimenting with new materials, adapting equipment for new regulatory requirements such as health & safety, fire, and sound/thermal/, new mechanical and electrical systems for buildings, modification of existing components and development of equipment for general construction. 

To conclude this report, it is evident that in 2021, with some industries the overall investment works alongside the amount of expenditure that has actually been claimed through the R&D Tax Credits scheme, but with many sectors, there is still an uneven balance.

Here at Green Jellyfish, we work with all companies from every sector to ensure they have claimed back tax credits on their R&D hard work.