Why is Research and Development so Important?
Investment into research and development (R&D) helps to grow businesses. Those that have an R&D strategy typically have a greater delta of success. R&D leads to innovation, increased productivity and can, when executed efficiently, boost a business’s competitive advantage. When executed perfectly it creates what Warren Buffett calls an economic moat.
Free Investment / Big Tax Win
The Government must be applauded for supporting R&D in the provision of tax credits to the UK Innovators, who are risking their precious capital in the pursuit of innovation and increased productivity. For tax purposes, the definition of R&D is broad by design - enabling relief to be directed to those making significant improvements or overcoming scientific or technological uncertainties.
It isn’t through altruism though, the UK government provides these tax credits. Britain is having a productivity crisis - labour productivity is the value of goods and services (output) produced for each hour worked and when it comes to the G7, only Japan and Canada are below the UK. For perspective, the average French worker will in four days achieve as much as their UK counterparts will in five.
This matters! Improved output per hour worked (productivity) is how as a nation we improve living standards. As the country gets wealthier, governments have improved resources, enabling them to evolve our infrastructure, invest more into public services or even cut taxes.
The UK spends 1.69% of GDP on R&D, as opposed to the EU which spends 2.07%. In order to improve on this, the Government is keen to “invest” through tax credits.
Red Tape stifling innovation
There is, of course, a “process”. It requires understanding what qualifies and how to best present it to HMRC. It is challenging for most businesses. We use a specialist. It can take up to six months to recover the funds. So whilst the Tax credits are invaluable, these are only available to those companies that can fund the gap from investment into the R&D and the six month “process” to recover the costs through the credits. The Government initiative is incredible and Capitalise benefits from this reverse investment, but the “process” limits its take up by SMEs more broadly.
An R&D Tax credit is an account receivable against the HMRC. Receivables are an asset against which a business can borrow. From a lenders risk perspective, HMRC as the receivable is essentially a risk-free lend (absent Armageddon). So as the volumes of R&D tax credits have grown so has the innovation in lending. There are now multiple lenders who will lend through the R&D tax cycle. In the main, lenders will look to a submitted claim that has been put in process and is already an HMRC receivable with an expected date. This typically enables funding for 1-3 months. For those that have had two or more submissions, it is possible to receive funding on submission, enabling funding for 3-6 months. For super established R&D innovators there are lenders who are increasingly willing to lend purely on your R&D spend up to six months prior to the submission, enabling up to 12 months lending, on the basis of your R&D track record.
At Capitalise we have helped many businesses who are in the process of claiming or have claimed R&D Tax relief to fund the gap. If you intend to do several R&D claims, knowing this is possible may speed up your timelines.
A force for good
Capitalise is future positive, meaning that we believe that capital is an instrument of change and used appropriately is a force for good. Hence our vision; “A future of sustainable businesses, supported by experts, built on strong balance sheets”.
When viewed through the lens of innovation and productivity, combining R&D Tax Credits and the ability to fund them means you are able to accelerate the time it takes to achieve your R&D goals and take a step closer to Warren Buffett's economic moat.
Book a consultation with our funding specialists to discuss how we can help your business with R&D funding specifically, or more broadly.