How changes to the R&D tax credits scheme can help “Build, build, build”
Enhancements to R&D tax credits could boost innovation in start-ups and SME’s, helping them to bounce back from the impact of the Coronavirus pandemic.
Our R&D team outline potential solutions and improvements that could be made, including improving incentives for medical research and renegotiating the application of state-aid rules.
UK R&D Roadmap
On the 1st of July 2020 the government released their R&D Roadmap, with the key themes being around levelling up innovation funding within various regions and improving the mechanism through which funding is granted, i.e. reducing admin and application burdens. The R&D Tax Relief Schemes remain the most penetrative innovation support there is, as it reaches any type of company that is conducting significant technological or scientific work, and HMRC have maintained their ability to process most claims within 1 month of application. The govt has put out a survey to query what are the aspects of innovation funding that stakeholders would like to see created/improved or reformed, and MHA MacIntyre Hudson will be actively providing input to this.
Making R&D Claims for SMEs Independent of Profit or Loss position
Many companies such as start-ups get lower cash credits back due to this being proportional to their loss positions, which they try to maintain close to break-even or at low profitability levels. This is unfair. In response, introduce a straight-forward Corporation Tax offset or Cash Credit, similar to the R&D Expenditure Credit used for larger company claims, but equivalent to the Benefit Level within the SME Scheme.
Expanding Cost Categories to include Expenditure of Modern Development
Bring forward the consultation to develop mechanisms to include software data-set acquisition costs, preferably to be treated similar to a consumable item, where the onus is on the claimant to remove any mark-up on the costs.
Improve Incentives for Medical Research
Vaccine Research Relief was withdrawn in 2017, and given the scale of disruptions to the economy caused by Coronavirus, it would be critical to support talent and investment into this research in the UK, especially given the very strong overall presence in medical research.
Re-negotiate Application of State-Aid Rules
The SME scheme is classified as state-aid, hence it cannot be used in conjunction with grants which are also state-aid, to subsidise the same piece of work. These rules have been set out by the EU to prevent distorted competition. However, given UK’s departure from the EU, and that almost every nation has injected vast quantities of financial support into their economies given the recent covid-19 crises, then the question of skewing competition becomes even more subjective. There is potential for the UK to further support its SMEs by reducing the scope or suspending these state aid rules, especially as the government are likely to be funding very large infrastructure projects.
Allow SMEs being Contracted by Large Companies to Claim in the SME Scheme
The large infrastructure projects highlighted above are likely to be headed by very large ‘Tier-1’ contractors, who would make R&D claims in the RDEC Scheme for any eligible work. Traditionally, these large companies cannot claim for the subcontracted element, but if an SME is the subcontractor, then they can claim this work in the less generous RDEC Scheme. As many of the large companies have aggressive performance contracts, these SMEs inherit very high project risks – and hence there should be potential for them to claim for this work under the more generous SME Scheme.
Improve HMRC Capability and Claim Turn-Around Rates
Hire more staff dedicated to processing R&D Claims, such that the standard processing period can be reduced from the nominal 28 days, to possible as low as 2 weeks. This will boost cashflow for companies enormously. Also, in terms of inspecting claims – instead of lengthy technical reports, maybe HMRC inspectors can set-up quick 15-30 minutes interviews with the Agent/Client to go through the claim and maximise the use of virtual tools to facilitate such interviews.
Find out more
Contact our R&D Tax Team today for more information or visit our Spotlight On: UK Economic Update page to read more of our exclusive coverage of this key Government update and to sign up to our special webinar with Global Economist, Professor Joe Nellis.