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R&D Tax Credits: Why are SMEs still missing out?

July 9, 2019

Talk about business growth is usually in the context of that all-important bottom line: Increased sales, improved margins or a bold entrance into new markets.

Hardly anyone ever mentions innovation, yet the development of new products and services has the potential to achieve all of these aims in one fell swoop.

The reason isn’t hard to discern. As growth strategies go, innovation is expensive. It takes vast amounts of financial and intellectual capital – not to mention time. It’s also risky. Getting it wrong can spell the end of an organisation, as the many startups falling foul of beleaguered research and development (R&D) each year will attest.

If businesses want to get ahead, and if the UK wants to compete on a level playing field in the post-Brexit landscape, we all need to innovate more.

When the Office of National Statistics (ONS) last collated data in 2017, it found the UK ranked 11th of all EU countries for R&D expenditure. UK businesses spent just 1.68% of GDP on R&D – up just 0.2% from 2016 – and overseas funding fell for the third consecutive year to just £5bn, from a peak of £5.6bn in 2014.

In the same year, the government set a target of spending 2.4% of GDP on R&D by 2027. However, the Confederation of British Industry (CBI) has pointed out this target will not be met until 2053 if current trends continue. The confederation has called for urgent government action to help achieve this crucial goal.

The government is already doing more than merely setting targets and expecting innovators to shoulder the burden.

In 2000, it caught up to Canada, France and the US when it introduced R&D tax credits for small and medium enterprises (SMEs). The tax credits allow any SME involved in the development of new technologies and services, or the enhancement of new ones, to claim generous relief in the form of a cash sum or corporation tax deduction.

In covering a wide array of development activities across the entire spectrum of business sectors, qualifying criteria is generously broad. Relief can even be claimed on unsuccessful projects.

For reasons that range from the excusable to the downright lame, many businesses have been reluctant to claim.

Excused are those who do not realise the scheme exists. (Unsurprisingly her majesty’s treasury does not make a huge song and dance about the immense amounts of cash it regularly hands out in this form).

A partial pass goes to those businesses who are aware of the scheme, but wrongly imagine their R&D activities don’t meet the qualifying criteria.

SMEs which do not know how to go about making a claim, or else believe it’s simply not worth the time and effort, must do better!

Remember those 2017 ONS statistics? They also showed the average R&D tax relief claim to be worth around £54,000 annually. That’s certainly not a figure to be sniffed at. While it is true that applying for relief is slightly more taxing than self-assessment, an application is easily worth £54K of any innovator’s time. That’s even truer when help from a tax relief specialist could make the process even more comfortable.

The take-home is clear. Businesses don’t have to be all that innovative to innovate smarter.  The role of R&D in maintaining the UK’s competitive edge over coming years is vital, and every organisation needs to play its part. It’s about time UK businesses began taking full advantage of this generous and vital incentive.

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