Research and analysis

Executive summary: Regional information on Corporate Tax reliefs

Published 24 April 2025

Prepared by BMG for HM Revenue and Customs. The views in this report are the authors’ own and do not necessarily reflect those of HM Revenue and Customs

Background  

HMRC commissioned BMG to undertake research into tax reliefs including the Research and Development (R&D) tax relief for small and medium-sized enterprises (SME), R&D expenditure credit (RDEC), and Patent Box.   

Research aims   

The overarching aim was to understand the regional spread of activities underlying R&D. The core objectives of this research were to:  

• understand the firmographics of businesses claiming these tax reliefs  

• understand where research and product development is taking place and how activity is split across multiple locations  

• understand the level of activity taking place across different regions  

• understand whether the regions where activity is taking place are different from where the claims are being made or the company is registered   

• explore companies’ R&D activities in more detail.  

Research methods  

The research comprised three strands of Computer Aided Telephone Interviewing (CATI), using contacts supplied by HMRC:  

• 525 interviews with claimants of SME R&D tax relief   

• 201 interviews with claimants of RDEC  

• 89 interviews with claimants of Patent Box  

The same questionnaire was used for SME and RDEC claimants, a separate questionnaire was developed for Patent Box claimants.  

Key findings  

Understanding the firmographics of businesses claiming these tax reliefs  

SME Relief  

R&D was the whole business of the company for 10% of all surveyed businesses. For 2 in 5 (57%) it was not the whole business but a regular and continuous part of what they do, and for the remaining 3 in 10 (31%) it was something done on a project-by-project basis as required.  

By size, a third (35%) of all surveyed businesses claiming the SME relief were micro (1 to 9 employees), half (53%) were small, with the remaining 12% being medium (50 to 249 employees) or large (250 or more employees).  

Six out of 10 (60%) of all surveyed businesses had been in operation for more than 10 years, and over a quarter (25%) for more than 5, up to 10 years. The remaining 14% had been in operation for less than 5 years.  

41% of all surveyed businesses had a turnover of less than £1 million in the year relating to their most recent claim. Over a third (36%) had a turnover of between £1 million and £5 million, and the remaining 22% had a higher turnover than this. The mean turnover was £4,262,449.  

RDEC Relief  

R&D was the whole business of the company for 15% of all surveyed businesses. For 56% it was not the whole business but a regular and continuous part of what they do, and for the remaining one in 3 (30%) it was something done on a project-by-project basis as required.  

By size, 2 in 5 (43%) of all surveyed businesses were micro (1 to 9 employees), a quarter (24%) were small (10 to 49 employees), one in 10 (12%) were medium (50 to 249 employees), and one in 5 (20%) were large (250 or more employees).  

The majority (69%) of all surveyed businesses had been in operation for more than 10 years, and 2 in 10 (20%) for more than 5, up to 10 years. The remaining 11% had been in operation for less than five years.  

A third (34%) of all surveyed businesses had a turnover of less than £1 million in the year relating to their most recent claim. Two in 10 (21%) had a turnover of between £1 million and £5 million, a quarter (24%) had a turnover of between £5 million and £100 million, and 15% had a higher turnover than this. The mean turnover was £212,338,928, although this should be treated with some caution, as it was inflated by a small number of very large turnovers.  

Patent Box  

Two thirds (64%) of all businesses surveyed were in the manufacturing sector, and three quarters (76%) operated from a single site.  

By size, 2 in 5 (44%) of all surveyed businesses were micro (1 to 9 employees), a quarter (23%) were small (10 to 49 employees), one in five (21%) were medium (50 to 249 employees), and one in 10 (8%) were large (250 or more employees).  

Seven in 10 (72%) of all surveyed businesses had been in operation for more than 10 years, and 2 in 10 (17%) for more than 5, up to 10 years, and 11% had been in operation for less than 5 years.  

Close to 3 in 10 (28%) of all surveyed businesses had a turnover of less than £1 million in their last full accounting year. Three in 10 (30%) had a turnover of between £1 million and £5 million, a quarter (24%) had a turnover of between £5 million and £25 million, and 14% had a higher turnover than this.   

Understanding the level of activity taking place   

SME Relief  

For almost all (98%) of surveyed businesses their qualifying expenditure included internal staff costs. Eight in 10 (79%) had purchased pre-designed software or consumable items, 2 in 3 (65%) had made payments to sub-contractors and one in 5 (22%) had made payments for externally provided workers (EPWs).  

Internal staff costs accounted for 55% of total qualifying expenditure, payments to subcontractors accounted for 22%, the purchase of pre-designed software for use in the relevant R&D or the purchase of consumable items accounted for 15% and payments for EPWs accounted for 7%.  

The surveyed businesses accounted for £343,997,765 of qualifying R&D expenditure, with an average of £655,234.  

The underpinning objective of this research was to explore the regional distribution of corporate tax reliefs. In terms of business location, while businesses in the South East accounted for 43% of all businesses surveyed, they accounted for half (50%) of the total qualifying expenditure, indicating that their qualifying expenditure is disproportionately high relative to their prevalence in the surveyed population.   

By contrast, while businesses in the West accounted for 16% of all businesses surveyed, they accounted for 10% of the total qualifying expenditure, indicating that their qualifying expenditure is disproportionately low relative to their prevalence in the surveyed population.  

RDEC Relief  

For almost all (96%) of surveyed businesses their qualifying expenditure included internal staff costs. Seven in 10 (70%) had purchased pre-designed software or consumable items, close to half (46%) had made payments to sub-contractors and a quarter (26%) had made payments for EPWs.  

Internal staff costs accounted for 64% of total qualifying expenditure, the purchase of pre-designed software for use in the relevant R&D or the purchase of consumable items accounted for 20%, payments for EPWs accounted for 10%, and payments to subcontractors accounted for 6%.  

The surveyed businesses accounted for £1,171,329,803 of qualifying expenditure, with an average of £5,827,511.  

While businesses in the East accounted for a fifth (18%) of all businesses surveyed, they accounted for a third (33%) of the total qualifying expenditure, indicating that their qualifying expenditure is disproportionately high relative to their prevalence in the surveyed population.  

Patent Box  

Overall, 84% of all businesses surveyed reported having expenditure on internal staff costs. A quarter (25%) reported spending £25,000 or less on internal staff costs, while one in 10 (7%) reported spending over £1 million. The mean amount of expenditure on internal staff costs was £257,068.  

The majority of surveyed businesses (80%) reported having expenditure on bought-in services and products. Over a third (36%) reported spending £25,000 or less on bought-in services and products, while 4% reported spending over £1 million. The mean amount of expenditure on bought-in services and products was £139,213.  

Over half (56%) of all surveyed businesses reported having received Corporation Tax relief under the Patent Box arrangements for one patent only, and among this group (50 businesses) that patent was most commonly acquired pre-2015 (62%), with the rest fairly equally split between 2015 (6%), 2016 (10%), 2017 (6%), 2018 (6%) and 2019 (10%).  

Among the 39 businesses who reported having received Corporation Tax relief under the Patent Box arrangements for more than one patent, 79% reported that those patents applied to different new products or processes. The remaining 8 businesses had patents that applied to different aspects of one particular new product or process.  

Three in 10 (30%) reported that the cost to the company of the qualifying development which led to the last/new product or process for which Patent Box relief was obtained was under £50,000. A similar proportion (29%) reported that it was between £50,000 and £250,000, and a quarter (25%) that it was more than this. 16% did not know or preferred not to say. The mean cost was £491,080.  

Half (51%) of all businesses surveyed reported a strong increase in their company’s profits from the introduction of their new/latest product or process, a further 29% reported a moderate increase, and 17% reported no significant change and2% of businesses reported a decrease.  

Understanding whether the regions where activity is taking place are different from where the claims are being made or the company is registered   

SME Relief  

Total away from headquarters qualifying expenditure accounted for 28% of all qualifying expenditure among SMEs, with payments to subcontractors accounting for 59% of away from headquarters qualifying expenditure, the purchase of pre-designed software or consumables for 28%, payments to EPWs for 8%, internal staff costs for 6% and clinical trials volunteers for 0.3%.  

Overall, 53% of away from headquarters qualifying expenditure went overseas, 23% went to unknown out of region UK locations ^{[footnote 1]}, 5% went to London, 3% to the West Midlands.  

RDEC Relief  

Total away from headquarters qualifying expenditure accounted for 35% of all RDEC qualifying expenditure, with internal staff costs accounting for 53% of away from headquarters expenditure, the purchase of pre-designed software or consumables for 29%, payments to subcontractors for 10%, and payments to EPWs for 8%.  

Overall, 28% of away from headquarters qualifying expenditure went overseas, 21% went to unknown out of region UK locations, 15% went to the South West and 14% went to the East of England.  

Patent Box  

Total away from headquarters qualifying development accounts for 29% of all qualifying development. Internal staff costs account for 46% of away from headquarters qualifying development, and bought-in products and services for 54%.  

Overall, 28% of away from headquarters qualifying development went to Yorkshire and The Humber, 30% went to unknown out of region UK locations, and a further 36% went to unspecified locations.  

Exploring companies’ R&D activities in more detail  

SME Relief  

Non-qualifying R&D activity  

Non-qualifying R&D activity includes the production and distribution of goods and services, capital expenditure under either of the R&D relief schemes, the cost of land, and payments for the use and creation of patents and trademarks.  

Two in five (42%) of all surveyed businesses had undertaken R&D or had R&D costs which did not qualify for R&D tax credits, and this was most common in the devolved nations (57%).  

For a third (32%) of businesses with non-qualifying R&D activity, this activity included capital expenditure, which equates to 14% of all surveyed businesses.  

Around one in 10 (14%) of all surveyed businesses undertook any R&D which was financially assisted by another body, most commonly Innovate UK (9%), UKRI (4%) or another public or voluntary sector body (3%).  

Purchase of datasets for use in R&D and cloud services  

Close to one in 10 (7%) of all surveyed businesses had purchased datasets for use in R&D, such as licencing data or purchasing the rights to a dataset to analyse to gain new knowledge in a particular area of science or technology, or to train an algorithm. A quarter (23%) of all surveyed businesses have non qualifying expenditure on R&D that includes costs relating to cloud services such as the use of Amazon Web Services or Google Cloud Platform to process and store data for R&D, use as a virtual test environment, develop software, or access to specific software offered via the cloud.   

RDEC Relief  

Non-qualifying R&D activity  

Half (48%) of all surveyed businesses had undertaken R&D or had R&D costs which did not qualify for R&D tax credits, and for 2 in 5 (38%) of these, this activity included capital expenditure (equating to 18% of all surveyed businesses).  

A quarter (25%) of the 37 businesses with non-qualifying capital expenditure had received a Research and Development Allowance ^{[footnote 2]} for this expenditure.  

A third (33%) of all surveyed businesses undertook any R&D which was financially assisted by another body, and this was most commonly Innovate UK (20%), another public or voluntary sector body (11%) or UKRI (9%).  

Purchase of datasets for use in R&D and cloud services  

Of all surveyed businesses 6%had purchased datasets for use in R&D such as licencing data or purchasing the rights to a dataset to analyse to gain new knowledge in a particular area of science or technology, or to train an algorithm. A quarter (26%) of all surveyed businesses had non qualifying expenditure on R&D that includes costs relating to a subscription to cloud services.  

Comparison of SME and RDEC results  

This section presents a comparison of the SME and RDEC results. Due to the differences in the nature of the reliefs, and the question set, Patent Box is not included in this comparison.  

Approach to R&D activity  

The approach to R&D was broadly similar for both SME and RDEC tax relief claimants. Over half in each case undertook R&D not as the whole business but as a regular and continuous part of what they did, and three in ten undertook R&D on a project by project basis, as and when required.  

Qualifying expenditure  

Around half of the qualifying expenditure for both SME and RDEC claimants was undertaken in the South East. However, the breakdown of qualifying expenditure for the remaining SME claimants was relatively equally spread across the other grouped regions, while the breakdown of qualifying expenditure for the remaining RDEC claimants is largely concentrated in the East.  

There were some differences by broad industry sector in terms of the breakdown of qualifying expenditure:  

• for SMEs, businesses in the professional, scientific and technical activities sector accounted for the greatest proportion of qualifying expenditure (38% compared with 16% for RDEC claimants), followed by businesses in the information and communication sector (25% compared to 12% of RDEC claimants)  

• for RDEC claimants, businesses in the manufacturing sector accounted for the greatest proportion of qualifying expenditure (31% compared to 18% of SMEs)   

The components of qualifying expenditure were broadly similar for SME and RDEC claimants, with the exception that SMEs were more likely to have had qualifying expenditure on sub-contractors (65% compared to 46% of RDEC claimants), and on the purchase of pre-designed software or consumables to an extent (79% compared with 70% of RDEC claimants).  

For both SMEs and RDEC claimants the greatest proportion of their qualifying expenditure went on internal staff costs (55% and 64% respectively). However, among SMEs, a greater proportion of qualifying expenditure went on sub-contractors than was the case for RDEC claimants (22% compared to 6%).  

Away from headquarters qualifying expenditure  

Total away from headquarters qualifying expenditure accounted for 28% of all qualifying expenditure for SMEs, and for 35% for RDEC claimants.   

The proportion of away from headquarters qualifying spend that went on pre-designed software or consumables was similar for both SMEs and RDEC claimants (28% compared to 29%), and the same for spend on EPWs (both 8%). However, for SMEs the greatest proportion of out or region qualifying expenditure went on sub-contractors (59%), while for RDEC claimants the greatest proportion went on internal staff costs (53%).  

While the highest proportion of away from headquarters qualifying expenditure went overseas for both SMEs and RDEC claimants, a significantly higher proportion of SMEs’ away from headquarters qualifying expenditure did so (53% compared to 28%).  

Other notable differences were that, among RDEC claimants, a greater proportion of away from headquarters qualifying expenditure went to the East of England (14% compared to 2% of SMEs), and to the South West (15% compared to 1%).  

Non-qualifying R&D  

Two in 5 (42%) SMEs had undertaken R&D or had R&D costs which did not qualify for R&D tax credits, as had half (48%) of RDEC claimants.  

For a third (32%) of SMEs and 38% of RDEC claimants with non-qualifying R&D activity, this activity included capital expenditure, which equates to 14% and 18% of all surveyed businesses respectively.  

Of the 75 SMEs with non-qualifying capital expenditure, 14% had received a Research and Development Allowance for this expenditure. This compares to a quarter (25%) of RDEC claimants.  

Around one in 10 (14%) SMEs and a third (33%) of RDEC claimants undertook any R&D which was financially assisted by another body, most commonly Innovate UK (9% and 20% respectively), UKRI (4% and 9% respectively) or another public or voluntary sector body (3% and 11% respectively). 

1. An unknown out of region UK location is where a respondent knew that the spend definitely left their HQ region, but they weren’t sure where this went within the UK   ↩

2. Research and Development Capital Allowances (RDAs) provide a deduction for capital expenditure on R&D, on assets used for R&D purposes, or on providing facilities for carrying out R&D.   ↩