The UK Government has a stated ambition to be ‘the world’s most innovative economy’ and has been supporting growth and innovation with the R&D Tax Credit scheme since 2000. However, when just 42,000 of the UK’s SMEs made any claim last year, and a significant proportion of companies are systematically underclaiming, what has to change to embed the Innovation Cycle within UK business?
Adam Kene, Managing Director, Kene Partners, shares a vision of a UK business climate that celebrates and rewards innovation at every level.
Great Idea, Wrong Name
Governments globally support innovative business activity through corporate tax relief or cash credit, freeing up funds to support growth and reinvestment. While the UK’s R&D Tax Credit Scheme has been in place since 2000, as a nation we still lag behind. A similar scheme was introduced in Canada as far back as 1944, while in the US, claiming tax relief for research and innovation has been a standard component of annual accounts production for almost 40 years. Despite the UK Government’s commitment to innovation, a combination of business apathy and lack of understanding has contributed to systemic under claiming: businesses of every size are failing to access the funds that are essential to support continued growth.
The R&D Tax Credit Scheme is, unfortunately, misnamed. The automatic assumption amongst business leaders is that credits are available only for life sciences, highly automated manufacturing or blue sky thinking. This is not the case: the credits are available to any business involved in product or process development or improvement. Essentially, the huge swathe of UK companies that are actively pushing improvement, business development and efficiency could and should be considering R&D Tax Credits.
Indeed, even those businesses at the forefront of innovative thinking often fail to recognise the opportunities for claiming tax credits. The new fusion industries – such as FinTech, MediTech, EnergyTech – are a prime example. These are dominated by new companies forging their way in new industries, leveraging bleeding edge technology to transform productivity, performance and service in established markets. Yet because these firms build on the disruption and blue-sky thinking of technology specialists, from Silicon Valley or Silicon Roundabout, they don’t recognise the opportunity to apply for R&D tax credits.
These companies would, however, most definitely recognise their day to day innovation, the essential progress being made in areas such as governance, frameworks, collaboration and shared learning – all areas that should prompt consideration for R&D Tax Credits. These companies may not be developing disruptive technology, but they are without any shadow of doubt front line innovators – and should be rewarded as such.
Unfortunately, the lack of understanding is not limited to business owners: very few accountants or financial advisors have a solid grasp of the complexities of the R&D Tax Credit Scheme. And, to be fair, when the Association of Taxation Technicians’ qualification includes less than a paragraph on R&D Tax Credits, the lack of industry expertise is understandable. The Big Four accountancy practices, which have traditionally led the market in this area, tend to focus on larger organisations; the accountants providing support for the innovative start up and growing SMEs that would most benefit from this additional investment are unlikely to have the skills, expertise or confidence to make a claim.
As a country, the UK is in a far better position than a decade ago; the innovation agenda continues to gain impetus, with new thinking in many areas, such as the collaboration between Department for International Development (DFID) and Department for International Trade (DIT) to leverage UK business expertise to deliver aid projects.
However, for innovative, forward thinking UK businesses to succeed both domestically and globally, the Innovation Cycle must become far more entrenched in business operations. An excellent step would be the rebranding of R&D Tax Credits to Innovation Tax Credits, a move that would immediately resonate with a far broader range of businesses and business leaders. But it is also essential to gain access to the right expertise – not only individuals who understand the intricacies of the complex Tax Credit system but are also able to inspire business leaders.
The private and public sector need to come together to champion innovation and ensure that innovation in all its forms is promoted, celebrated and rewarded.