Simon Brown, managing director of R&D tax credit specialist ForrestBrown, explains how vital funding for businesses is being overlooked – yet it could be available in just four weeks and need never be paid back
It barely needs saying that the economy is in crisis. The FTSE has plummeted, the travel and hospitality sectors may have endured the worst of the coronavirus crisis, but no industry has been spared. At the start of April, as many as one in five businesses were facing collapse within a month.
About the same number (18 per cent) report less than a month’s worth of cash in reserve, while 44 per cent say they have just one to three months’ worth of money. The need to find new reserves or additional income has never been more urgent. It’s hard to think of a situation where so many businesses, of all sizes and in all sectors, are so desperate.
The Government is stepping in, with £330bn backing loans from banks. But these have been slow to materialise and there have been a number of challenges along the way. Initially, there were reports of banks demanding personal guarantees and imposing eye-watering interest rates of 30 per cent.
Even smaller companies can receive much bigger claims – millions of pounds in some cases
Things have improved after a crackdown from the chancellor, but the loans will still need repaying at some point. Those businesses taking on debt now may be stifled by it when the recovery comes.
However, there is another way. Research and development tax credits are a Government incentive designed to reward UK companies for investing in innovation – something we’re seeing a lot of in the battle against coronavirus.
They’re nothing new, having been launched back in 2000. Over the past 20 years, they’ve proven to be a valuable source of cash for businesses and have supported significant growth. On average, SMEs get about £53,714 per claim based on 2017/18 figures.
However, even smaller companies can receive much bigger claims – millions of pounds in some cases. The average for larger firms is about £601,000 based on the same data. This amount of money could help enterprises remain solvent so they can live to grow.
It may sound mercenary to be looking for “free cash” at a time of crisis, but that would be a misunderstanding of how the credits work. R&D tax credits are a reward for businesses that have already invested in staff, materials and other project overheads.
In fact, HMRC itself has found that for every £1 of tax foregone, up to £2.35 of additional R&D is stimulated, which boosts the economy and will drive greater tax income for the Government. Perhaps every £1 invested in saving innovative businesses across the country could save £billions in lost tax revenue, unemployment payments and sluggish growth after the crisis.
For its part, HMRC is continuing to do everything it can to ensure this vital source of funding continues to be available to those working determinedly through this period, and many firms have been looking for support in making a claim in the past days and weeks.
Only certain things can be claimed for and a foot wrong at this stage can cause problems down the line.
One shrewd business using R&D tax credits to help plug the funding gaps and get through this challenging time is our new client MY Construction. This is a fantastic main contracting business based in London and we spoke to them just five days before their March tax year-end.
On March 27, we had a first call where our R&D process was outlined and engagement letter was sent. They were soon approving the submission we had prepared for the year ended March 31 2018. The amount? Hundreds of thousands coming back into the business when they needed it most.
That’s the transformative potential of this incentive done properly. However, demand is high and the pressure facing the HMRC to process applications is extraordinary. With this in mind, it’s worth getting the claim right first time. With businesses hanging in the balance, there’s no margin for error.
A claim starts with the gathering of all the appropriate information – usually data such as payroll and accounts. Next comes the identification of qualifying activities and costs. Only certain things can be claimed for and a foot wrong at this stage can cause problems down the line. To be sure, firms really need a specialist so they neither over – nor under claim.
From these identified qualifying activities, a benefit figure can be calculated. But to be accurate, it needs to decisively navigate a host of business-specific complicating factors – like grants and subcontracting arrangements.
Overall, it must have a robust methodology behind it. This should include a technical narrative, a summary of costs incurred and how the claim has been calculated. The next step is submitting the report in the way HMRC wants to see it. It’s vital to update the Corporation Tax return amended to include the R&D tax credit calculation.
Even if a business is in hibernation mode right now, it is possible to undertake a claim by collaborating with a specialist.
There’s been talk of businesses attempting to undertake the claim in 24 hours. This is a recipe for disaster and a sure way of inviting an enquiry into a poor claim that could cost a business dearly when they can least afford it.
However, it can be achieved quickly – if not overnight – with the right approach. Even in lockdown. Many businesses have resorted to home and remote working, and this should be harnessed to ensure the appropriate people are included in the claim process.
In summary, it’s important not to underestimate the value of R&D tax credits done properly. In challenging times, businesses need every bit of help they can get. That means not leaving a penny of the value you’ve earned unclaimed.
Simon Brown founded ForrestBrown in 2013. It is now the UK’s largest specialist R&D tax credit consultancy, advising more than 150 companies a month