As featured in The Business Guide, in the Telegraph published Saturday 27th January 2024.

Don’t let innovation cost you — support still available for true research and development

Businesses that previously claimed under the R&D Tax Credit scheme are rethinking their choices following a series of changes to the R&D Tax Credit scheme in 2023. HMRC started to reform the scheme to tackle fraud, amounting to an estimated £1.13bn claimed in 2020/21.  

Despite the right intentions, there’s a risk that HMRC’s changes cause an increased fear of enquiries, and businesses subsequently reduce their use of the R&D tax credit scheme, with a detrimental impact on UK innovation and the economy. This risk contrasts starkly with the government’s aim to position the UK as a world leader in science, research and innovation.  

Despite these concerns, there are many financial options for innovative UK businesses, the key is understanding what you’re eligible for. The definition of true innovation has never been more important, and we strongly encourage businesses leading the way in their industries to continue taking advantage of innovation funding options including R&D tax credits, grants and patent box.  

Other types of funding, such as private investment SEIS and EIS schemes have received continued support from the government — which rewards investors with a 50% tax break on up to £200,000 invested through SEIS, or 30% on up to £1mn through EIS. 

In times of economic uncertainty, financial efficiency comes into its own 

Regular access to accurate numbers should be a fundamental part of any business, but the reality is that many businesses fail to gain clarity in this area due to lack of time, knowledge, or conflicting priorities. Understanding what the numbers mean enable you to make informed decisions and react quickly to threats – as well as opportunity.  

Don’t leave money on the table by missing out on financial aid (whether that’s R&D tax credits, or reduced tax via Patent Box) or attracting investors by SEIS or EIS – and equally, if you’re planning to apply for grants, ensure you know what’s involved from the beginning to maximise your chances of success. It’s incredible how many people go into this process with confidence, expecting easy access to free money, when the reality is that the application process demands a great deal of visibility and clarity on the strategy over your current business performance, as well as accurately forecasting where the raised money will be spent. 

Consider the three Rs  

The role of a tax advisor is to assist their clients with the rate of tax they pay, the risks involved and reputation (3 Rs). One of the big changes in boardroom behaviour in the last ten years is they’ve become very attuned to the reputational risk to be seen to be not paying their fair share of tax. 

Rate – you can turn this to fundraising, through financial efficiency – if you’re paying the lowest ‘right’ amount of tax then that is effectively financial efficiency and a different way of looking at fundraising. What the government wants you to do is pay the right amount of tax, at the right time. Without employing an advisor, you will probably pay the right amount of tax, in terms of paying within the correct band. This banded tax system means that there’s a higher ‘right’ amount of tax and a lower ‘right’ amount of tax, depending on where in that band your advisor calculates you should sit. The job of an advisor is to enable you to pay the lower right amount of tax, without crossing the risk threshold, making sure you’re utilising the options available to you to push you into the lower end of your tax band.  

Risk – Is HMRC coming after you, and challenging what you’ve done and what you’ve reported to them? Whether you’re right or not, that’s time-consuming and takes you away from doing what you are best at. So, there’s that risk, but there’s also the risk that you’ll end up having to pay a higher amount of tax. And penalties to go along with it should you file incorrectly. 

Clients sometimes say they don’t want to pay any tax. The role of a tax advisor is to talk about mitigating tax down to the lowest risk-free number. Very rarely will you end up with no tax at all.  

Reputation – it’s easy to illustrate this area using a large, well known public company like Starbucks as an example – they get plenty of publicity about the fact they don’t pay much tax in the UK. This causes people to boycott their products, both voting with their feet and not buying their products, as well as publicly negatively commenting via channels like social media. This notion extends to non-public profile companies because how much tax they pay, and whether they’re being aggressive in their approach to tax becomes apparent through their accounts. Customers and suppliers will reference your accounts, looking not only to see how much money you’re making to negotiate, but also looking at how much tax you’re paying – and will they want to be associated with a company not paying the right amount of tax?  

Expected changes in legislation 

We’ve seen that HMRC’s move to clamp down on fraudulent activity in the R&D tax credit market has flushed out rogue advisors as well as fraudulent (knowingly or otherwise) claimants, which is precisely what they intended to do through the legislation changes of 2023.  

We have also already seen the effects of this on innovative businesses, some of which now choose to avoid the scheme through fear of enquiry or investigation. 

Online learning

The good news is that there are plenty of financial options which could act as a catalyst for growth in your business this year, and we’ll be talking more about these in our webinar series. 

If you want to build financial resilience this year, watch our on-demand webinars to hear about how to prepare your business for funding in 2024.

Episode #1: Tax-efficient funding options for start-ups

Episode #2: How to deploy non-dilutive funding

Episode #3: What you need to know ahead of PE/VC investment

Register for episode #4: Exiting Your Business, A Planning and Strategy Masterclass, June 6th, 11am