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How R&D Tax Credits are fuelling growth in the UK

Innovation is a critical element if an economy is to thrive. Mike Price, Director at MPA, writes about how the government’s R&D Tax Credit scheme rewards companies that invest in innovation, and urges more companies to take advantage of this funding.

The government’s Research and Development Tax Credit scheme is designed to reward UK companies that invest in innovation. HMRC has awarded over £16 billion to forward-thinking businesses since 2000—a financial windfall used to support new ventures, investment in new equipment and the employment of more skilled staff; ultimately fuelling business growth.

It is a fact that for any economy to thrive, innovation is a critical element. In fact, the EU itself has stated that in order for an economy to grow, a minimum of three percent of a country’s total GDP should be reinvested into research and development. So, with concerted efforts being made to stimulate the UK’s lacklustre productivity levels to drive better competitiveness, it is clear that a commitment to innovation will be essential for a prosperous economy going forward.

The R&D Tax Credit scheme

The UK government has, for a number of years, recognised the value that innovation delivers. The R&D Tax Credit Scheme incentivises and rewards both large and small companies that are prepared to invest in innovation. Put simply, this means that an organisation incurring costs in developing new and improved products, processes or services can receive a cash payment from HMRC via a tax credit or a tax reduction. In reality, this results in an often significant cash injection back into a business or reduced liability on tax bills: cash that can then be reinvested to support new business ventures, further equipment investment or employ a greater number of skilled staff.

Some of the work being undertaken by UK companies is breathtaking in its ambition and complexity, and should rightly be recognised as such. R&D tax credits aim to do this, though only a small percentage of businesses are currently taking advantage of this scheme. With around 25,000 qualifying companies having made a claim under the scheme, and with estimates of the existence of 750,000 tech based UK companies, it is clear that many have yet to investigate a scheme that can deliver real value back to a business.

What does HMRC qualify?

The tax break principles of R&D tax credits reward and stimulate innovation. The simple way to assess whether activities qualify is to examine activities in a business focused on developing new services or products, often to meet a new market or customer need. Efforts to think outside of the ordinary, projects that fail, but with the lessons learnt, go on to succeed through the development of a new product, service or process. The journey to their creation—not the standard steps—are what will entice HMRC to reward pushing the envelope.

Some examples where organisations can demonstrate qualifying activities include the time a company spends on a R&D project, the costs incurred using specialist subcontractors, items that are ‘‘consumed or transformed’’ by the R&D process, and components purchased to construct a prototype, as well as software used as part of the project. It is vital that all such activities and investments are not missed when compiling an R&D tax credit claim. There is no limit on the amount that can be claimed, and typically organisations can recover up to 33% of qualifying costs, even if the company is loss making. In fact, HMRC figures from 2015–16 show that the average claim value under the scheme was £109,500 – a substantial addition to a business’s bottom line. It is safe to say that for a number of companies the ability to obtain a cash injection thanks to tax credits has been a lifeline. Not only has it supported them when financial pressures have been intense, it has also provided the funds to help the company expand and grow.

The Future for R&D Tax Credits

The outlook for the scheme is positive. Recent pronouncements indicate that the government remains committed to the scheme, with the 2017 Budget committing an extra £2.3 billion for R&D investment. The latest allocation, which will focus on artificial intelligence, full fibre broadband and 5G mobile networks, indicates the government is determined that the UK remains a country where innovation is both recognised and rewarded. Furthermore, all changes made to the scheme’s qualifying criteria, certainly over the last decade, have seen increasingly generous allowances made. Though underused, it remains a well-known if not entirely understood scheme, when compared to the rules and regulations surrounding other currently available grant and loan processes.

Continual and increased promotion of R&D tax credits would be helpful to alert firms not familiar with the scheme. Limited resources at HMRC make this a challenge, but if stakeholders such as financial advisors and accountancy firms increased efforts to better understand the benefits for their clients, then claim levels would certainly rise. It’s really about advisors securing knowledge of the scheme to ensure their clients receive all the tax breaks to which they are entitled—including R&D tax credits.

Finance professionals will undoubtedly be aware of the many grants, incentives and loans available for innovating companies. However, the complexities of working in accordance to stringent HMRC guidelines can make producing a compliant claim difficult. However, in the years ahead, with the right specialist support,even more of the country’s innovating businesses can also profit. The R&D Tax Credit Scheme is a prime example of where government can make a difference on the ground. The thousands of organisations which have, to date, seen the benefit of a successful tax credit claim, would certainly agree.

Mike Price, Director at MPA

This article first appeared in Bloomberg BNA Tax Planning International Review, December 2017 edition

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Talitha Heaton
Talitha Heaton Marketing Executive

My role in the marketing team is relatively varied – which is something I love about working at MPA. Recently, I’ve worked on our new brand as well as the development of Nova, our new service offering. In marketing, we’re always trying to find better, more effective ways of communicating with innovative businesses across the UK. Our aim is to raise awareness of the support available to these businesses and ensure receiving that support is as easy as possible.