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Radeep Mathew, Head of Consulting for innovation funding consultancy Leyton UK looks at the recent figures for R&D tax credit take up among SMEs and why many may be missing a trick when it comes to financially benefiting from their investment in technology.

On paper, the recently published HMRC results for the take up of the R&D tax credits among SMEs look encouraging. In 2016/17 the total number of claims rose to 52,335, an increase of 20% from 2015/16. The increase was primarily driven by a rise in the number of SME claims, which totalled 45,045 in 2016-17, an increase of 22% year on year. However peeling back the curtain of the headline figures reveals a somewhat different picture. The truth is the UK remains well behind many major advanced economies in its investment in R&D. In fact the most recent ONS figures revealed the UK’s investment to be just 1.69% of national GDP, well below the European average of 2.07%.

R&D tax credits

The government’s plan to address this shortfall is the R&D tax credits regime. The scheme is designed to encourage greater spending in research and development, leading to greater investment in innovation. The way the scheme operates is by reducing a company’s corporation tax bill on the company’s qualifying R&D expenditure or by the payment of a credit, again linked to the company’s R&D spend.  This then creates a pool of innovation resources for re-investment. The idea being that this furthers the continuous innovation culture of the business. 

But while awareness of the scheme is embedded within large companies, many SMEs remain unaware of what they can claim for. The simple reason for the big increase in claims among SMEs as reported by HMRC is that there is a steeper hill to climb. The vast majority of clients we work with are first time claimants who have had little or no awareness of the scheme previously. 

Another challenge is in the concentration of claims. The ‘Manufacturing’, ‘Professional, Scientific and Technical’, and ‘Information and Communication’ sectors continue to have the greatest volume of claims, making up a total of 68% of claims and 73% of the total amount claimed for 2017-18. While the awareness of the scheme in certain industries remains high, in others it is far more patchy. Industries like digital media, food and drink businesses, architectural firms or dentists simply don’t realise that a lot of their work counts as R&D.

Products, processes and computing

Research and development, as defined by government, covers broad set of activities across a variety of industries. This can cover products, processes and computing, ranging from improvements to existing methods or the development of new methods.

Examples of technological developments SMEs might be able to claim for could include:

  • Developing or integrating different technical systems for improved performance or additional features, for example CRM systems, ERP systems and SAS systems
  • Building web frameworks and software packages for improved security and scalability
  • Cloud computing and large-scale data management, for example migrating to Amazon AWS, Google Cloud, Microsoft Azure

Embedding innovation

It is perhaps unsurprising that SMEs have underclaimed for a number of years. They are paradoxically so busy focused on the innovation their company brings to a market to have the time to necessarily claim for the same innovation. Adding a layer of complexity with form filling and getting to grips with the intricacies of a tax regime can be a big impediment. However in a challenging economic environment, it can be a vital component of the bottom line. The benefits accrued can help with cashflow or additional capital to spend elsewhere in the business.

If the Government wants to realise its goal to ‘double down on R&D’, as Boris Johnson recently called for, there certainly needs to be better education and communication.  We also think the government could go even further in offering more financial incentives to companies prepared to invest in innovation. SMEs are at the forefront of developing innovative technical solutions to the challenges their businesses and industries face. it is time to reap the rewards.