HM Revenue and Customs recently released their annual Research and Development Tax Credit statistics. For those who work in R&D, the findings contain some great news. The amount of money spent on R&D tax credits by the Treasury in 2018/19 was £5.2bn, continuing a year on year growth in government spending that has increased exponentially from the level it was at at the turn of the millennium. Clearly, with government investment at levels unprecedented in this country, this is a great time to be working in R&D. However, is this high level spending sustainable, especially considering the recent economic shocks caused by Coronavirus and Brexit? And what else can we learn from the statistics?
The benefits of increased government spending on R&D are fairly self explanatory. The more funding that is offered to companies who undertake R&D, the more likely companies are to spend time developing new products and services. R&D expends time, resources and money, and can fail to provide any tangible improvement to a company’s bottom line for months or even years, as a new product goes through rounds of testing. By providing this money upfront, the government frees up companies to carry out thorough R&D work without an economic pressure to get their product to market without thorough testing. This incentivisation is all the more important considering the widely reported post-Brexit ‘brain drain’ that has been occurring in recent years, whereby many young people of working age are choosing to leave the UK for EU countries.
Additionally, the funding is an invaluable source of income for smaller businesses. SMEs are typically hotbeds of innovation, dreaming up disruptive new products and ideas, and making them a reality. Think of any app that you have on your phone that was truly innovative when it was first released. Chances are, it was probably invented by a startup, in London, Berlin, California, or New York. The fact that the UK Government are providing such healthy funding to R&D in the UK increases the chances that the next Uber, Deliveroo, or Spotify will be coded from an office in London or Manchester, rather than Silicon Valley. Indeed, 88% of the R&D tax credit claims made in 2018/19 were made by SMEs – companies with less than 250 staff.
However, it’s not all good news. The sums that the UK government is spending on R&D are huge, and growing year on year. For context, the size of the R&D budget is 10% of the country’s Defence budget, a truly astronomical figure that is one of the main expenditures the government must manage. This must also be seen in the context of Brexit and Coronavirus. The UK is now out of the EU, but we are currently in a transition period that ends on December 31st, during which the country is negotiating its future relationship with the EU. It’s impossible to predict what might happen, but at present it seems likely that these negotiations will fail, and deliver a no deal outcome, which would cause an economic shock.
Additionally, the myriad impacts of Coronavirus – not least the shuttering of many brick and mortar businesses and the necessary but wildly expensive furlough scheme – have had a devastating effect on the economy. The government are likely to cut corners in spending in the coming weeks and months, and it’s not unthinkable that they’d see a portion of the R&D budget as being expendable.
In my opinion, the most likely outcome is that the process for applying for R&D tax credits will become longer and more difficult, and the criteria for being successful in your application will become more robust. If this happens, I don’t think the government will want to abandon R&D entirely, as it has such a positive overall effect on the economy. However, they’ll be much more stringent, only offering financial support to research projects that have the potential to be significant boosts to the economy. If this happens, it would be a real shame. In recent years the UK – and London particularly – has become a real hotbed of innovation, and the growing government funding for R&D, while not the only factor, has played a huge part in cementing the UK’s R&D reputation.
A similar situation has recently occurred in Australia. The application process for their government’s R&D funding was previously quite notably lax, with companies finding it relatively easy to apply for and receive funding for their latest endeavours. However, the funding was cut, and the criteria for accessing funding was made stricter, meaning that less funding is presently available. I think that this is the future the UK is heading for, but only time will tell.
As well as outlining the amount of money spent on R&D, the report also breaks down how it was spent, providing an interesting insight into the government’s R&D priorities. As previously mentioned, the lion’s share of the funding was given to SMEs, with only 12% of claims being awarded to large companies. However, the 88% of overall claims made by SMEs only translates to 57% of the overall amount of funding handed out. So while the government clearly has a focus on funding SMEs for R&D, the disparity is not quite as pronounced as it may first appear. Additionally, the sectors that received the majority of the funding were – as worded by the government – ‘Manufacturing’, ‘Professional, Scientific & Technical’ and ‘Information & Communication’, with these sectors receiving 71% of the overall £5.2bn. It’s worth keeping this in mind if you’re applying for tax relief and your work falls outside of these areas. These are priority areas for the government, so your application will have to be pitch perfect to stand a chance.
If you would like to talk about whether your company is eligible for R&D Tax Credits, then get in touch with our friendly team today.