Why UK businesses need to wake up to R&D tax credits

Simon Brown, managing director at R&D tax credit consultancy ForrestBrown, discusses the ‘lack’ of a claim culture

Innovation is the lifeblood of most businesses but, in the current climate, there is a heightened aversion to financial risk. However, a new ForrestBrown report shows that government incentives designed to increase innovation have boosted economic productivity and given companies a vital financial lift.

The study, A Nation of Innovators, based on a survey of 247 UK business leaders, revealed a strong appetite for innovation. In fact, three quarters valued innovation as either essential or a high priority with nine in ten planning to innovate over the next three years.

What is most interesting for finance directors is that our research showed a clear discrepancy between this intention to innovate and plans to make use of the research and development (R&D) tax credit incentive, meaning many businesses could be missing out on an important source of funding.

The incentive tends to have a significant positive impact on the businesses that use it. Eight in ten said the incentive was important to their company’s overall financial position, and almost half had used the benefit to hire new staff.

Tax credits arrive in the form of a cash payment and / or a corporation tax reduction – in most cases within four to six weeks of submitting a claim – which is hugely valuable to businesses in mitigating the financial risk of investing in innovation.

A confused picture

But it’s not all good news. Our study showed that a relatively large number of businesses are either not using the incentive at all or are not getting their claim right. Why is this? In our view, the definition of research and development itself could be holding organisations back. It is not well understood and as a result misconception is rife.

For the purpose of these incentives, R&D takes place when either scientific or technological uncertainty is resolved. The definition is purposefully broad so that it can apply equally to all sectors, and products, process and services alike.

For example, more than half of our respondents weren’t aware that changes or modifications to an existing product could be classed as R&D, and three quarters didn’t know that unsuccessful R&D could also qualify.  A company may only produce one product that it continually modifies and updates, so the rules are designed to incentivise any activity that seeks an improvement.

Key lessons:

• Be open minded to what qualifies as R&D. The definition is purposefully broad so that it applies equally to all sectors
• Don’t be afraid to seek a second opinion on whether your business activity qualifies
• Identify all qualifying Getting them right is key to maximising a claim
• Present R&D claims to HMRC clearly using examples to explain how scientific or technological uncertainty was resolved
• Keeping good (ideally, real-time) records of investment in R&D will make claims more precise

Where does the responsibility lie?

More often than not, it is down to the FD and finance staff to deal with issues relating to tax compliance. However, due to the level of insight required to assess the work that has taken place that could qualify for R&D, it is crucial that technical staff are also involved to maximise the opportunity.

A collaborative and open-minded approach will give companies the best possible chance of getting it right. Those that do, as we’ve seen, have gone on to make significant strides forward.

My advice to innovative businesses is: if you’re not already claiming R&D tax credits, check you’re not missing out, and if you are, make sure you’re getting your claim right.

A claim in practice

Trustpay Global Ltd, a unique online and mobile payment platform provider, were advised that what they were doing didn’t qualify as R&D but, on making enquiries, soon realised that their activities were in fact eligible for a claim.

Peter Barnes, CFO at Trustpay Global, explained: “We have spent the last five years building a scalable payment platform to offer our customers a unique user experience and provide connectivity to a wide-range of payment methods.  We continue to develop the platform to provide innovative solutions to our customers in multiple jurisdictions and markets.

“We now have two successful claims under our belt.  I was surprised by the size of the claims that we able to make and the level of support provided by the Government under this scheme.  As a start-up company, the funds have been invaluable and enabled us to recruit additional staff to accelerate the development of our system which, in turn, has allowed the company to grow.”

Simon Brown is managing director at R&D tax credit consultancy ForrestBrown