R&D tax credits: Government must “take urgent steps” to support innovation

R&D tax credits: Government must “take urgent steps” to support innovation

Luke Hamm, CEO of GovGrant, has said that the government must add some “rocket fuel” to the R&D tax credit scheme or risk losing out to competitors abroad, while Mark Smith, Partner at Ayming has concerns over HMRC's ability to handle the increasing number of claims.

R&D tax credits: Government must “take urgent steps” to support innovation

In the wake of HMRC’s annual research and development (R&D) tax credit statistics, tax specialists GovGrant have called on the government to do more to help innovative businesses in the UK. The statistics measure the amount of tax credits claimed by the UK’s most innovative businesses during the previous 12 months.

The CEO of GovGrant, Luke Hamm, argued that more generous incentives were necessary to attract greater investment into the UK and to compete with other nations.

“We are way behind our major competitors when it comes to government expenditure on R&D support, at 1.7% of GDP, well short of the government’s 2.7% target. Sweden, Austria, Denmark and Germany already invest above 3.0% of GDP in R&D,” Hamm said.

“The evidence that the UK economy benefits from tax is plain to see from this latest report, and we urge the Chancellor to take note and introduce in extra help for our most innovative businesses, large and small.”

Indeed, research by the IFS released this week showed that Brexit uncertainty was damaging private investment in the UK. Hamm suggested that the UK government should take lessons from Ireland’s, who have mitigated the impact of Brexit on their economy by boosting R&D tax credits.

“The Irish budget specifically identified R&D tax credits as a way of protecting the Irish economy from the uncertainty of Brexit and made a bold move to increase support in its budget for 2020,” he said.

Adding some “rocket fuel”

Although HMRC’s report shows that they are getting close to the target £5bn worth of claims with HMRC saying they expected to reach £4.95bn, GovGrant suggested four ways that the government could add “rocket fuel” to the scheme:

• “Increase the enhancement rate from 130 to 150% to help businesses benefit from R&D,
• More help for owner-managed businesses who don’t take a salary but are dedicating their lives to innovation through better R&D tax breaks
• Widen the scope of tax credits to other industries like social sciences
• Improving the scheme to bridge the gap between R&D and Intellectual Property. Inventive companies need government help to commercialise their inventions.”

These initiatives would, according to Hamm, give significant growth to the number of small claims (under £5,000).

“It is high time for the government to be bold in this area. It spends 0.6% of the total tax take on R&D tax credits and delivers £8.1bn of R&D spend as a result. That is a massive return on investment and crucial if the UK wants to be a destination of choice for innovative businesses post Brexit,” Hamm said.

“Taking positive action on tax credits would send the clearest possible signal that the prime minister and chancellor really are standing up for UK business,” he added.

Still good news for SMEs

While Hamm had a number of proposals to improve the R&D tax credits scheme, he did concede that the overall picture was still good, particularly as more SMEs had begun claiming.

“The good news is that the number of claims by UK SME businesses accessing the tax credits system has increased by 22% between 2015-16 and the end of 2017. 77% of all claims are from SMEs, and there’s been a welcome 15% increase in the number of first time SME applications.”

However, the concentration of claimants in London also suggested that more awareness was needed in other regions for SMEs outside of London to feel the benefits.

Hamm said that in London and the South East there were over 16,000 claims in 2017-18, whereas in Wales (c.1800) and the North East (c.1700), the numbers showed that “there is a big opportunity for the scheme to boost businesses in these areas”.

Questions over infrastructure

However, Mark Smith, Partner – Innovation Incentives at Ayming, was concerned that as more SMEs began claiming that HMRC did not have the necessary infrastructure to manage the number of small claims.

“The incentives will need to be even more accessible if the UK is to hit its targets. And with claims continuing to rise, does HMRC have the infrastructure to review so many claims?

“Managing this steep incline in claims activity is proving tricky already with some problems emerging around claims processes. Recently it’s been revealed that it has taken businesses seven months to receive claims and that smaller businesses have been struggling with application processes.

“Delays to claims will have a real effect on business cash flow. Perhaps a manageable problem for larger businesses but for SMEs, it’s a game changer. It’s absolutely crucial HRMC has sufficient infrastructure and resources required to operate smoothly, particularly considering claims are set to increase. If not, it’s going to stifle innovation,” Smith added.

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