The UK is a global leader in innovation. In the 2018 Global Innovation Index, we are ranked fourth, behind only Switzerland, the Netherlands and Sweden. With Brexit just around the corner, remaining an innovation leader is critical to our competitiveness. Enter R&D tax credits – a vital, but underused, government lever for innovation.
Introduced in 2000, these credits aim to support UK businesses investing in innovation by reducing their tax bill or allowing them to claim a credit on loss-making activities. According to HMRC, for every £1 the government gives in credits, between £1.53 and £2.35 of research is stimulated.
To qualify for the incentive, a company has to be able to demonstrate that the project has made an advance in science or technology, had to or tried to overcome uncertainty, or couldn’t easily be worked out by a professional in the field – prove, in other words, that it is truly innovative. Since 2000, over 240,000 claims have been made, totalling £21.4bn.
But two problems remain. First, 90 per cent of eligible companies are not claiming tax credits, according to one government report. Second, the kind of innovation that can be claimed may not be keeping pace with the UK’s changing economy.
Although HMRC statistics show the number of claims is increasing – by 25 per cent to 39,960, worth £3.5bn, in 2016-17 – those claims remain relatively small. Three-quarters of them are for under £50,000.
The recent Budget brought in a change to the system that some worry could lead to further confusion: the reintroduction of a PAYE and NIC cap for SMEs. From April 2020, the amount a loss-making company can receive in credits will be capped at three times its PAYE and NIC. The cap is in response to a number of fraudulent claims made by what HMRC refers to as "artificial corporate structures". It says 95 per cent of current claimants will be unaffected.
"Unintentionally, early-stage innovative start-ups could be penalised if they can’t yet afford to take on permanent staff," warns Jenny Tragner, director at R&D tax credit consultancy ForrestBrown. "We have concerns that this measure will create added complexity."
And on the subject of being able to claim for the ‘right’ kind of R&D, innovation foundation Nesta has noted that one of the UK’s fastest-growing sectors, the creative industries, is effectively shut out of the science-and-technology-focused credit. Post-Brexit the government may need to incentivise a broader definition of innovation.
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