R&D – Innovating Out of a Crisis

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Craig Blackmore, Director of Verde Corporate Finance looks at the current incentives for businesses who are innovating through R&D, and asks if the current support is sufficient to incentivise innovation for the future economy.

Lessons will undoubtedly be learned from the Covid-19 crisis.  The crisis has already seen businesses adapt to new ways of working through greater (and better) use of technology, not only providing improved ways of communication but also innovative ways of addressing business operations and tasks.  Businesses have even adapted to production of completely different products for Covid-19, with distillers and perfumers creating production lines for hand sanitiser, amongst others, coming to mind.

Innovation is the lifeblood of UK enterprise. 

The creation of solutions to improve and increase efficiency, productivity or meet changing market conditions is what, some would argue, puts the Great into Great Britain.  The response to Covid-19 could see just that, with work on new ways of living and working being created as each day passes, not to mention the tireless efforts of scientists looking to find a vaccine for the dreaded virus.

Ironically innovation is not new to the UK and successive UK Governments have recognised this with continued and increased support of businesses investing in research and development (R&D), with a reciprocal investment in those businesses through R&D tax relief.  This valuable relief has benefited a multitude of businesses over recent years, with the most generous relief received by SME businesses.

So far, the UK Government seems to have responded well to Covid-19 business needs; furlough (job retention scheme), CBILs, Bounce Back Loans and Future Fund – all being well received.  But, well respected scale-up data analysis firm Beauhurst wants Rishi Sunak and the Government to go a step further.  Beauhurst is backing a campaign to double R&D tax relief in this tax year to encourage, maintain and even stimulate innovation, and I have to say, I am in full support of this great idea.

Despite all the great support on offer, gaps have appeared where early stage and loss-making businesses can’t access loan support and giving away more equity is not an option.  Plus stopping their R&D activity would likely (at best) delay their progress to market and the ability to generate revenue, profits and tax take for HMRC.

Increasing R&D relief and speeding up the process of rewarding the investment in new and innovative products and services, has got to be a good thing.  If innovation is not encouraged, then the UK economy is highly likely to take more time to rebound from what is expected to be the hardest hitting recession for a generation.  This still needs businesses to invest time and money into R&D activity and then wait, perhaps for some time, to get the tax benefit.

I believe that HMRC could even go a step further than Beauhurst are suggesting. 

Where businesses have already made successful R&D claims, HMRC could be making a ‘payment on account’ for the equivalent of 50% of a business’s last R&D claim six months after their year-end.  Ultimately, this does not increase the relief available but advances the payment that will fall due anyway.  In this scenario, a company with a March 2020 year-end would receive part payment in September 2020, instead of waiting to receive all in early 2021.   This earlier than expected cash injection, could prove vital to the prospects of the business.

The combination of both measures will go a long way to supporting and helping businesses which sorely need a financial stimulus, and this will keep the UK economy on track to achieve the V-shaped recovery we are all hoping for.  Many UK businesses are still not claiming the R&D tax relief that they are due, so promotion and improvement of this entrepreneurial relief should be high on the agenda for getting businesses and the economy moving again.

Craig Blackmore has a successful track record advising on R&D tax claims and is a Director of Verde Corporate Finance, part of the GS Verde Group, which operates from offices in Bristol, Cardiff, Pembroke Dock, Oxford and London.    To get in contact with Craig email [email protected] or call 029 2240 3445.