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How the changes to R&D tax relief could save SMEs billions

Mark Tighe, CEO at RD Tax Solutions, explains why the chancellor is on the right track with R&D tax relief but needs to fine-tune his message.
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I’d like you to put to one side the humiliating u-turn on Class 4 NICs that came a week to the day after chancellor Hammond stood at the despatch box, and focus on other parts of the Spring Budget. It’s a big ask, I know, as many readers of Real Business will be company directors or work for themselves. But for me, please give it a go.

After all, beyond the, ahem, national insurance omnishambles, other parts of the Budget were actually half-decent. They were focused on future-proofing the UK economy through improved infrastructure and equipping people with both the practical and technical skills needed for a competitive – and innovative – workforce. Which brings us rather conveniently to research and development (R&D).

To ensure Britain is at the forefront of innovation, one announcement in the now infamous Budget was to simplify the UK’s R&D tax regime. “To further support investment, the government will make administrative changes to the research and development expenditure credit to increase the certainty and simplicity around claims and will take action to improve awareness of R&D tax credits among SMEs,” Hammond said in his speech.

This is very welcome news, given that in our experience, only a tiny percentage of UK business owners are currently claiming back tax relief on R&D activity they have undertaken – a major reason for this, being the perceived hassle and mind-blowing complexity involved in the process (the other being a complete lack of awareness that R&D tax relief exists in the first place).

Clearly we have yet to see how the administrative burden will be reduced in practice, the paperwork it will save and the time it might shave off an R&D claim, but the intent is there and that, for now, should be welcomed. Whatever your politics, and as much as it has some pretty serious communication problems at the top, this government is certainly proactive around R&D.

But there is still room for improvement. One of my immediate concerns in the aftermath of last week’s Budget speech was that the chancellor was once again giving the impression that R&D tax relief remains the exclusive preserve of companies working on the most cutting-edge technologies, from driverless cars and artificial intelligence to robotics and manufacturing technologies for a new generation of medicines. He singled these out in his speech.

Nothing could be further from the truth, and this is a myth that we have been seeking to debunk for quite some time. In highlighting the most scientific and technological sectors where R&D tax relief can be claimed, the chancellor is giving out the wrong message to everyday businesses which, while not sporting white coats and working in laboratories, are also eligible for R&D tax relief. And indeed make up the vast majority of those firms applying for it.

In the 2014/2015 tax year, for example, normal, “everyday” SMEs were responsible for more than four in five UK R&D claims. These claims are being made by all kinds of businesses, ranging from breweries and pharmacies to construction companies and even restaurants. What matters isn’t that these companies are doing something so ground-breaking, that Bill Gates would be proud of them, but that each have developed a new product or service, or implemented a new business process. And many UK firms, even the smaller ones, are doing that day-in, day-out often without knowing.

The chancellor, as the policy paper extract quoted above reveals, wants to better educate UK businesses about R&D tax relief – and that, for me, is an important step. But at a more granular level, the message he needs to be giving out should be that even you, Mr Everyday Business Owner, could be eligible for this tax relief. It is not just there for multi-national PLCs.

There is a lot of hard work to do yet in raising awareness among business owners and CFOs about lucrative R&D tax relief, how it works, and the massive impact it can have on their companies. We’re moving in the right direction, of that I have no doubt. But now we need to fine-tune the message. If the chancellor would like to visit some of the everyday companies performing R&D, away from the laboratories, he should drop me a line. That’s assuming, of course, he is still in a job.

Mark Tighe is CEO at RD Tax Solutions.

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