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September 29, 2017

Where is your next round of innovation funding coming from after Brexit?

SME tech businesses claimed, on average, £65,199 of innovation funding in 2015/16 from the government using research and development (R&D) tax incentives. That’s according to the latest figures from HMRC.

Interestingly, that’s the average – many such businesses receive significantly more, sometimes hundreds of thousands of pounds. A crucial source of funding that doesn’t dilute equity.

These latest HMRC statistics paint a positive picture of increasing research and development in the UK.  They hint at a virtuous circle of innovation for both the companies that claim R&D tax credits and the wider economy. As specialist advisers, we see this amongst our client base. The extra money they receive from R&D tax credits increases their appetite for risk, driving them forward on their journey to creating remarkable products.

We wanted to share one or two points that will be relevant to you in the wider context of innovation funding.

  • Overall take up of the UK R&D tax credit scheme is up 20%.
  • Tech firms account for 27% of SME claims – (that’s those categorised as ‘Information and communication’ but there will be more nestling in other sectors).
  • SME tech firms claimed £385 million.
  • R&D tax credits stimulated up to £6.8 billion of extra research and development expenditure in the UK.

That last point is the one I want to zero in on, because it demonstrates the value for money of the UK R&D tax credit scheme. That is important for its long-term existence. The government spent £2.8 billion on it by the way, so it pays back to the economy at a rate of up to £2.35 million for every £1 million spent on it.

Why is this relevant to you?

Hopefully you are already claiming R&D tax credits. There is a strong uptake among the Notion portfolio and the wider tech community. You may very well also be in receipt of grant funding. And that may well be sourced from the EU.

The Horizon 2020 scheme, for example, is the EU’s biggest grant framework. It is in the process of distributing €80 billion between 2014 and 2020. The UK is very active within Horizon 2020, and has the highest number of signed contracts with 7,360. What happens to this funding source after Brexit completes?

Hopefully the UK government can strike a deal to continue to be part of the EU innovation projects, or it fills the void with more direct grant schemes. In either case, there will be a high degree of uncertainty. £350 million a week was the figure written on the side of the Brexit bus, but there will be a lot of parties fighting for a share of that.

So, as another form of innovation funding, an R&D tax credit scheme in rude health and with clear benefits to the wider economy is great news for businesses like you.

The current Conservative government and previous coalition and Labour governments have all progressively increased the generosity of the R&D tax credit schemes. Slightly detached from this, there is a cross party consensus to try and get spending as a proportion of GDP up from current levels of 1.7% to 3% in the future (the OECD average is 2.4%). In other words, a favourable political climate towards encouraging R&D.

This is a stability in funding that tech companies who live and die by their R&D may come to be grateful for, once the full impact of Brexit hits.

Another silver lining

Another factor that will be interesting to see play out as Brexit happens is: what will happen to the interaction between grants and R&D tax credits? Currently, EU rules impose complex restrictions on what can be claimed through the R&D tax credit scheme if a grant has been received.

Once we are out of the EU, this may open the door to grants and R&D tax credits being used more freely alongside each other. If you can picture it, that would provide innovative companies with an unrestricted double-whammy of innovation funding to further their R&D.

ForrestBrown specialise in helping the digital sector

Those HMRC figures I mentioned earlier indicated that 27% of the SME claims came from the information and communications sector. When you consider that other sectors like financial services will contain significant digital innovation, we can imagine that this figure will nudge up a bit.

At ForrestBrown, we have much higher than average level of experience in technology claims. This enables us to identify R&D that would be intangible to others and prepare robust claims to get our clients more money with less risk. If you would like a free R&D tax credit claim review to ensure that you are not missing out qualifying innovation from your claims, give me a call directly on 07557 791 769.

Post produced in partnership with Adam Kotas, Director at ForrestBrown.

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