Many growing companies may be missing out on vital support for their activities. Christian Doherty looks at how Government support for innovation can help.
Encouraging smaller businesses to grow and invest in new products and services has been a stated goal of successive governments, from the Industrial Councils of the 1970s through to Margaret Thatcher’s Enterprise Allowance Scheme and, later, Business Links. They all had broadly the same goal: using the tax system and a variety of loans and grants to give smaller firms a leg up.
The success of these initiatives has been mixed. During the past 15 years, the number of schemes aimed at supporting SMEs has become something of an alphabet soup, with the Enterprise Investment Scheme (EIS) jostling for attention with the Regional Growth Fund (RGF), while the Business Finance Partnership (BFP) looks for businesses to support through a Knowledge Transfer Partnership (KTP) scheme.
Amid all this, the main weapon in the Government’s arsenal has been research and development (R&D) tax credits, which launched in 2000. They are designed to offer particular advantages for small firms with fewer than 500 staff and a turnover of less than €100 million, or a balance sheet total under €86 million. The credits allow these firms to claim up to 230 per cent of their qualifying costs from their yearly profit, even including staff or contractor costs.
“This has been a surprisingly consistent part of Government policy and is part of efforts by Government to increase overall R&D spend to 2.7 per cent of GDP by 2027,” explains Chris McDonald, Enterprise and Innovation policy chair at the FSB. Achieving that 2.4 per cent figure became an important measure, as the UK lags behind the OECD group of countries in R&D spend, and R&D is seen as key to improving growth and living standards.
Despite repeated efforts to raise awareness of the credit – and how it can help smaller firms grow – knowledge and use of the scheme has historically been stubbornly low. Things are beginning to change, though, says Mr McDonald. “At the outset, take-up from small businesses was quite low, but this has been recognised by Government and it is improving. However, there are challenges in claiming, particularly around the definition of R&D.”
It was this question that Chris Walker, Managing Director of Diamond Hard Surfaces, a Towcester-based company, had to grapple with when he first ventured into the R&D tax credit regime. Despite the initial work involved in assessing whether the company’s work would qualify, he says the relief provided by the scheme has been critical to the firm’s success.
“We looked into R&D tax credits because they fitted with our needs,” he says. “When you start a new business you do a lot of R&D, which is costly. This Government tax relief is designed to encourage innovation and IP in the UK. Using this relief encourages investment and ensures that the capital you’ve invested in the business at an early stage goes as far as possible.
“The business started off as one man in a laboratory being funded by a venture capital trust,” he adds. “Under those circumstances, it’s common practice to look at R&D funding because much of the work that’s being undertaken is R&D at that early stage of the business.
“It’s not an onerous process for us because we’ve set up a simple system for tracking our work,” Mr Walker explains. “With a typical new project, we invest heavily in R&D up front with the prospect of this turning into production in the long term. We attribute all our costs either to R&D or production including the administration element. The process followed by our accountant takes these costs and follows the Government guidelines to produce a submission which, once approved, is refunded to you at the end of the year once you’ve filed your corporate tax return.”
Diamond Hard Surfaces initially used the services of a specialist adviser to help track its R&D spend and file the paperwork correctly, a common practice for companies in this space. Tom Verner is the Managing Director of Momentum Group, a Belfast-based consultancy advising on R&D activities.
“A lot of people don’t understand the nuances of the regime, and whether they qualify,” he explains. “The majority of businesses we work with tell us they’ve been doing the same thing for 10 years, so surely that’s not R&D. But when they start to explain in detail what they’re doing, which usually involves making a product, process or service better, then they start to see that perhaps they might in fact qualify.
“We work with a bakery that was looking for a way to bake 10,000 ‘clean’ sourdough rolls every week in a consistent way,” he says. “They wanted to know how they could achieve that. It’s a process that needs work and innovation, but many companies like that bakery don’t see what they do as innovative. But it is, and the credits are there to encourage and support that.”
Mandy Ridyard, like Mr Walker, has made a point of researching the grants and loans on offer. Her business Produmax produces flight control components at its factory in Baildon, near Bradford.
The business has grown rapidly during the past couple of years after partnering with the High Value Manufacturing (HVM) Catapult scheme. Designed to funnel finance from Innovate UK to SMEs, as well as organising collaborative R&D with larger firms and universities, the HVM scheme derives a third of its £300 million annual turnover from Government.
“We grab all of the opportunities that we can find with both hands and run with them,” says Ms Ridyard. “The Government puts out lots of help for companies, but the challenge is finding where you can get that help from, which is what brought us to something like the Catapult.”
Dick Elsy runs the HVM Catapult. He points to the positive impact of schemes such as the Catapult and R&D tax credits as evidence that Government efforts are working. “I’ve had a long industrial career and I’ve never seen anything like what we have at the moment in terms of positive Government intervention, with proper instruments in place to help people practically with new technologies,” he says.
“Interestingly, those companies that are prepared to think differently and do their research benefit very strongly from it – but others that can’t be bothered and just moan are missing out.”
Navigating the path, however, isn’t always easy. “We involve ourselves
with anything that’s available but, for a company of our size, it’s hard to find that way in in the first place,” Ms Ridyard says. “I talk a lot at events about how to find your way in,
because it’s a bit of a labyrinth. The trick is finding the labyrinth in the first place and then navigating your way through it.”
Again, this gap in understanding has been recognised by Government, with the growth in specialist advice companies evidence that some simplification is required. However, businesses don’t necessarily have to go down that path.
“It’s best to take the time to build an understanding of the system within the business,” says Mr McDonald. As chair of the innovation policy committee for FSB, he oversaw the publication of a report last year (Spotlight on Innovation), which showed that many small companies are engaging in R&D activity without realising it, and just need to understand how to get the support they’re eligible for.
“I would advise starting with the growth hubs and your own accountant and taking it from there,” he suggests. “Innovation is a specialist area and bespoke to individual businesses, so ultimately it is worth taking the time to develop the understanding yourself, and you can then decide if there is any value in engaging an adviser or if this is something you feel you can handle.”