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”. Accountants have the choice to help their clients with this process or refer to a R&D tax specialist partner.
Regardless, It can take up to six months to recover the funds. So whilst these Tax credits are invaluable, the time it takes to file, review, be approved and ultimately recover the funds means that tax credits are only available to those companies that can fund the six-month gap. The Government initiative is incredible and Capitalise benefits from this reverse investment, but the “process” limits its take up by SMEs more broadly.
Luckily - you can fund the Gap
An R&D Tax credit is a receivable against the HMRC. Receivables are an asset against which a business can borrow. Just like an outstanding invoice, these R&D Tax credits can be used to raise funds. With the added benefit that, from a lenders risk perspective, HMRC as the receivable is essentially a risk-free lend - due to the extreme unlikeliness of the HMRC defaulting (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 provides funding for a term of 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 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 work with many accountants whose clients have claimed R&D Tax relief. The ability to support clients to fund the gap means you are providing business owners with the full package.