The mystery of the Midlands’ missing millions

Innovative companies in the West Midlands could be missing out on over £60 million  in unclaimed tax breaks simply because they don’t think they’re eligible, according to PwC.

UK private business invested around £21 billion in research and development (R&D) in 2015-16, according to statistics from the Office for National Statistics (ONS), with the West Midlands accounting for around 10.3% of total UK R&D spend.

However, PwC has calculated that, while over 10% of UK R&D spending is incurred in the West Midlands, only around 8% of claims for R&D reliefs come from the region.

This is in contrast with other UK regions like the East of England, which accounts for 13% of both UK R&D spend and R&D claims and the South East with 20% of both spending and claims.

Angela Browning, Innovation Incentives Director leading PwC’s Midlands team, says that the  missing 2% may have cost West Midlands’ companies around £60 million in one year alone:

“The latest statistics from ONS and HMRC show a steady increase in overall UK investment in R&D and claims for R&D credits.

“However, in a region like the West Midlands where we have some of the UK’s leading businesses, it is surprising that there is such a discrepancy between what companies are investing in R&D and what they are claiming in terms of support for their investment.

“The £60 million gap in credits not claimed could have made a substantial difference to the region’s investment, profitability and sustainable employment.”

PwC says that, while the difference between R&D spending and R&D claims in the West Midlands is substantial, there is another and potentially bigger gap between investment and return.

The latest data shows that the number of companies making *Patent Box claims nationally increased by around 40% in just one year, to 1,135 companies. However, the total number of Patent Box claimants was just 5% of those making R&D claims, suggesting vast numbers are still missing out.

The Patent Box scheme offers substantial tax savings to companies exploiting patent protected technology, which can be the outcome of investing in R&D. Each Patent Box claim delivers on average, £575,000 of tax savings, which is more than five times the average R&D claim value.

Angela Browning says that companies that have invested in R&D may not yet be generating revenues and profits and might therefore, not be claiming Patent Box tax relief, but the numbers still don’t add up:

“Early stage development companies might not be expected to claim and others choose not to file patents to protect their intellectual property and thus don’t qualify.

“However, even taking those into account, the statistics unequivocally suggest that many companies are missing out to the tune of many millions. The Government’s Industrial Strategy stresses the importance of tax in stimulating R&D and innovation, with new investment worth £2bn per year promised by 2020, accompanied by a review of current R&D tax incentives to ensure the UK’s global competitiveness.

“An additional 100 Patent Box claims could add as much as £57 million of tax savings to West Midlands companies. Add the ‘missing’ £60 million in R&D credits and the West Midlands could be inadvertently turning its back on well over £100 million of tax incentives.”

“Every company needs to claim the incentives to which they’re entitled – failing to do so puts them at a serious disadvantage in an increasingly competitive world.”

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