There’s plenty of support for small firms that invest in new ways of doing things, which could come in handy in the current climate. The problem is not everyone knows about it, says Christian Doherty.
The UK still represents a phenomenally good place to start up a business and it’s got a really rich ecosystem around R&D and innovation.” That’s the view of Nick Bassett, Head of Investor Partnerships at Innovate UK.
However, with Brexit and Covid-19, the UK has a challenge on its hands if it is to keep up with global competition. “There is a huge gap between companies that can raise £10 million and earlier-stage companies,” Mr Bassett admits. The UK spends 1.7 per cent of GDP on R&D; contrast that with Germany (2.8 per cent), the US (2.4 per cent) and Austria (3.7 per cent).
Part of the issue is knowledge. Recent FSB research showed that 40 per cent of ‘incorporated new-to-market product innovators’ are not aware of R&D tax relief relevant to their business. Only 10 per cent of innovating smaller firms have accessed support from the Government.
“Companies struggle at their early stages,” says Mr Bassett. “Innovation doesn’t follow a straight line, so money has to be deployed at an early stage where there is the highest level of risk and where the highest returns can be.” An innovation support system with nine main providers of advice and funding doesn’t help.
The complexity hasn’t stopped many start-ups from engaging with the innovation funding system. Euan Campbell started his medi-tech business Cohesion Medical seven years ago, and its digital patient management tools have become part of the NHS’s remote patient care system.
Cohesion benefited from a number of innovation schemes. “We managed to bootstrap with a combination of revenue and friend and family money at the beginning,” he says. The company was then able to access three Small Business Research Initiatives and won two awards from Innovate UK.
“The awards are like an exam - you need to study, and you might not pass first time,” he explains. “As long as you ask why you didn’t get a certain question right, and go back with an improved answer, you start realising you’ve got not just the right answer but a really good answer.”
Innovate UK runs competitions around a broad range of technical challenges and offers funding grants to businesses that can demonstrate suitability. Companies must meet the criteria and pass viability tests to win.
Mr Campbell believes the benefit goes beyond the financial. “This process forces you to ask if you’re doing the right things, whether you can articulate what your business does and how you will move it forward.”
Cohesion supplemented its innovation funding with R&D tax credits, something Mr Campbell urges others to follow. “We’ve learned more about it since we started. Often that’s taking free advice from HMRC: they can tell you what is R&D, what’s allowable and what we can claim.”
For 20 years, the tax credit system has been the foundation of governments’ efforts to encourage innovation. There are a number of different versions of the tax credit, and many smaller companies will qualify for SME R&D relief. This allows them to deduct an extra 130 per cent of qualifying costs from their yearly profit, as well as the normal 100 per cent deduction. They can also claim a tax credit if the company is loss-making, worth up to 14.5 per cent of the surrender-able loss.
“Many small businesses don’t even know they’re doing R&D,” says Mr Campbell. “That period when you’re not earning any money? That’s when you should be doing R&D.”
There are also issues around what counts. “A huge number of small businesses engage with ‘new to firm’ innovation but not ‘new to market’ innovation,” says Chinara Rustamova, Senior Policy Advisor for Innovation and Skills at FSB. “HMRC cites the latter as eligible, not the former.”
There are hopes that as part of its ‘R&D Roadmap’, the Department for Business, Energy and Industrial Strategy will allow a broader application of the rules to ensure more activity falls under the R&D tax regime.
Guy Bridge, Managing Director of funding platform Finpoint, which runs FSB Funding Platform, helps small and start-up businesses understand the support. In his view, knowledge of what’s available is poor, although many companies have heard of R&D tax credits.
“Many companies don’t feel they are eligible,” he says. “A company has to have less than 500 staff and a turnover of less than £100 million. However, companies that spend money developing new products, processes or services, or enhancing existing ones, are eligible for R&D tax relief.”
If you’re spending on innovation, you can make an R&D tax credit claim to receive a corporation tax reduction and/or cash payment. “If you’re claiming for the first time, you can typically claim R&D tax relief for your last two completed accounting periods,” says Mr Bridge.
Jenny Tragner, a director at R&D consultancy ForrestBrown and member of HMRC’s R&D consultative committee, says that getting the right help is crucial. “Any reputable advisor will be regulated. They’ve spent time studying the tax system to adhere to ethical codes. If you engage with unregulated advisors, you don’t have much protection. Then it’s about working with an advisor that will partner with you on the process. There are lots of ways to prepare a claim.”
With many advisors offering a ‘no-win, no-fee’ service, the perception of R&D tax credits applications as risk-free has grown. Not so, says Ms Tragner. “You can outsource the process, but not the risk. HMRC has identified abuse in the system, and that’s led to a hardening of their approach, so you need to be sure you’re working with a reputable firm.”
For Euan Campbell, the benefits of innovation funding go beyond financial. “It does make you start thinking more innovatively,” he says. “You start looking for different ways to do things. Cultural change can be the biggest thing.”