• Only 45% of eligible SMEs are taking advantage of reliefs
• Research shows major regional differences in number of claims

Small businesses are missing out on millions of pounds of government tax breaks designed to encourage innovation in the UK, according to research by Deloitte, the business advisory firm. Less than half (45%) of eligible small and medium sized enterprises (SMEs) are taking advantage of research and development (R&D) tax relief, and almost a quarter (24%) that haven’t claimed are unaware that the incentive exists.

Of the 563 companies interviewed, over 80 per cent that have yet to make a claim employ less than 50 technical staff, suggesting that the scheme is not reaching the smaller enterprises that could most benefit from the cash flow boost of the repayable cash credit.

David Cobb, head of R&D tax services at Deloitte, said: “It’s ironic that the firms that can benefit most are the ones that are missing out. The reliefs cover much more than traditional scientific research performed by people in white coats, and specifically apply to experimental development activities in manufacturing and software. Any company developing new products, materials, processes or services may be eligible to claim tax relief.”

Deloitte’s research shows major regional differences in the number of SMEs making claims. Less than 10 per cent of the firms questioned in the Midlands are applying for the tax relief, and only one-third of those in the North East and South West. Companies in London, Scotland and Northern Ireland appear to be the most switched on, with some 55 per cent of eligible companies making a claim.

In a bid to help more companies take advantage of the incentives available, Deloitte has launched specialist R&D tax teams in Bristol, Cambridge, Leeds, Manchester and Reading, with plans for more to follow in the Midlands.

Cobb added: “The R&D tax relief provisions are still fairly new and are relatively complex. It appears that some companies are put off by a perception that claiming is difficult or they are simply unaware that they may be eligible to benefit from the scheme. By becoming the first firm to invest in specialist R&D tax expertise across the country, we can help SMEs identify opportunities and guide them through the process.

“The positive news for SMEs is that the majority of firms that submitted a claim for R&D tax relief found the process fairly straightforward, with only a third rating one or more aspect of the process as challenging. However, the main source of difficulty still appears to be reaching agreement with tax inspectors on the interpretation of the DTI guidance on which activities are eligible for relief.

“Changes introduced at the last two Budgets show that the government recognises the need to help more SMEs navigate the R&D claim process. However, further work is required to simplify the process and raise awareness of the scheme if the government is to meet its ambitious target of increasing R&D spend to 2.5% of GDP by 2014.”

“Surprisingly, three-quarters of the firms that have made a claim reported that the introduction of the relief had not caused them to change their R&D investment decisions, and five per cent had reduced their R&D spend. This is particularly disappointing given that the tax credits were specifically designed as an incentive to increase the levels of business expenditure on R&D, and we urge SMEs to consider if they are making the most of what is available to them.”

R&D tax incentives work by reducing corporation tax payable for tax paying companies. For companies in a loss making position, it can create cash repayments from HM Revenue and Customs of up to 24 per cent of the qualifying R&D expenditure. For every £1,000,000 spent on qualifying R&D a large company can claim up to £75,000 of benefit. An SME spending the same amount can claim a reduction in taxes of up to £150,000 or, if loss making, a cash repayment of up to £240,000.

For further information on R&D tax incentives in the UK, and the support available from Deloitte, please visit www.deloitte.com/uk/rd.

Ends

Notes to editors

About the research
Deloitte conducted a survey of 563 UK SMEs with up to 250 employees in March 2006 to investigate the uptake of government tax breaks targeted at small and medium sized enterprises engaged wholly or partly in research and development (R&D) activities.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Known as an employer of choice for innovative human resources programmes, it is dedicated to helping its clients and people excel. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities.  Neither DTT nor any of its member firms has any liability for each other’s omissions.  Services are provided by member firms or their subsidiaries and not by DTT. 

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. 

The information contained in this press release is correct at the time of going to press.