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R&D for SMEs

When it comes to finding the spare cash for research and development, there are plenty of funding and tax-relief opportunities available to SMEs.

Last updated: 23 Jun 2019 7 min read

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Concrete Canvas's flexible 'fabric' is used in construction and engineering projects.

In just 13 years, Concrete Canvas, creator of a flexible fabric that hardens into a solid-concrete layer for use in engineering and construction, has laid a successful path from an Imperial College London and Royal College of Art start-up to exporting to over 50 countries.

In order to develop its unique idea, Concrete Canvas secured a broad range of investment and funding support. This included prize money from design competitions, equity investment and research and development grant funding from the East Midlands Development Agency, and as part of the Smart Awards scheme from the Welsh government. It now has a turnover of £10m.

“R&D has been fundamental to what we do. We didn’t sell anything for the first four years, and we were 100% focused on product development,” says co-founder Will Crawford. “As we’ve grown and commercialised, we still invest around 20% of our overheads into R&D.”

Funding options

True AI is a company bringing artificial-intelligence algorithms to customer service. In its two years in operation, its R&D has been boosted by funding from the EU’s Horizon 2020, Innovate UK and pre-seed funding. “It’s been very important. AI is a dynamic and fast-growing sector and you have to keep pace by investing,” says co-founder and CTO Abhishek Aggarwal.

As True AI discovered, there are a variety of funding options available to SMEs and start-ups looking to power their R&D, including Business angels and venture capital schemes such as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

Often, early R&D can be too much of a risk for private investors and therefore state grants can help get prototypes made or carry out market research. These include innovation loans and funding competitions from government agency Innovate UK, grants from Local Enterprise Partnerships (LEPs) and regional governments and the EU’s EUREKA Eurostars scheme to foster collaborative research among European SMEs.

The UK government, as part of its Industrial Strategy, recently vowed to boost R&D spending by £80bn over 10 years.

However, according to latest figures from the Office for National Statistics (ONS), the total R&D spend in the UK is 1.68% of GDP, lower than the 2.03% average of other EU countries.

According to tax-relief specialist firm Catax, only 1% of the estimated 1.9m businesses eligible for tax credits on R&D have claimed the relief.

Tax credits

Alongside the Patent Box, a corporation tax relief that gives a reduced rate of 10% tax on income deriving from the commercial exploitation of patents, R&D tax credits are vital for innovating businesses.

They are for companies that spend money developing new products, processes or services or enhancing existing ones. According to research and development specialist ForrestBrown, qualifying businesses are eligible for either a cash payment and/or corporation tax reduction with credit rates equivalent to 33p for every £1 of qualifying expenditure.

If a company is taking a risk by attempting to “resolve scientific or technological uncertainties”, they may be carrying out qualifying activity. The R&D doesn’t have to have been successful to qualify for tax credits, and a claimant does not have to be profitable. A firm can include work undertaken for a client as well as its own projects.

When making an R&D tax credit claim, firms can claim for spending on staff including salaries and pension contributions, materials, consumables and some types of software. They can be used as an alternative to innovation grants for research and development funding.

The average claim made by SMEs in the UK, says Catax, is £43,000, and the application is made to the HMRC. It usually takes four to six weeks to process.

“Companies are genuinely surprised when you tell them that even if you’re a cafe owner making a menu nobody has ever seen before, you can claim R&D tax credits. If you’re progressing technology forward, you can do it”Paul Johnson, group MD, Catax

“These credits are phenomenally helpful,” says Harinder Sandhu, director of EmpowerRD, provider of automated R&D tax credits. “It can help firms keep operating until they proof out their value propositions. It gives them a R&D runway.”

Both Concrete Canvas and True AI have taken advantage of R&D tax credits. “If you invest in R&D and don’t invest in sales, your cash flow is impacted,” says Aggarwal. “But R&D credits help keep that cash coming in.”

Aggarwal chose EmpowerRD to makeTrue AI’s claims after doing a price comparison of firms. “We made our choice on value and expertise. As a growing business, we do so much other work that you need to hire a third party to ensure the claim is correct,” he says.

Complexity

Crawford of Concrete Canvas says the R&D tax credits scheme has become more complex to administrate as the company has grown and begun developing other projects. “About three years ago we swapped accountants, and a crucial part of the selection process for a new one was their knowledge of tax credits,” he says. “It’s not a straightforward system and could be a lot, lot easier to administrate. You really need professional advice to help you.”

Firms must show the level of investment in R&D in a claims application and demonstrate the time allocated by staff members solely to R&D, says Crawford.

“I understand why there’s a need for checks and balances to ensure the system isn’t abused, but there’s a lot of additional bureaucracy and report writing that could be cut down,” he says.

Sandhu agrees there’s an issue with red tape, but says HMRC is “quite understanding that many start-ups won’t have robust systems to track what their staff do every single minute”, adding: “Estimates are fine.”

Qualifying activities

Sandhu believes a bigger problem is many advisers charge too much commission – up to 25% on the final payout – and take too long to put a claim together for clients.

“There’s also a lack of HRMC guidance on which activities qualify for R&D credits,” he says. “Some firms are wary about contacting the HMRC because they fear that claiming for the wrong thing could open up an investigation on them.”

Paul Johnson, group MD at Catax, agrees there is confusion about who can claim. “There’s an idea that you can only claim if you’re using technology and making cutting-edge development such as driverless cars,” he says.

“Companies are genuinely surprised when you tell them that even if you’re a cafe owner making a menu nobody has ever seen before, you can claim. If you’re progressing technology forward, you can do it. We need to get that message out.”

The Research and Development Expenditure Credit moved from 11% to 12% in January 2018.

“This rate increase is targeted at large companies, but it’s also available to SMEs in receipt of state aid for their R&D such as through grants,” says Catax CEO Mark Tighe. “This is an area of tax relief often overlooked and under-claimed.”

And to raise awareness, HMRC is launching a campaign to spread the word to firms that they may be eligible. A HMRC spokesperson says: “The campaign will particularly focus on SMEs using and developing key emerging technologies to ensure they can access the maximum amount of support from R&D tax credits. Small companies can also apply for an ‘advance assurance’ before making their first claim. Through this, they will have an HMRC specialist to help them understand and comply with the R&D tax relief conditions.”

Adds Catax’s Johnson: “The schemes out there are generous to SMEs. They can be really significant for those investing in R&D and help the UK succeed post-Brexit. Give R&D a go.”

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Leadership and Management, Tech and Innovation