Poor knowledge of government incentives is holding back the innovation economy
Given the business, economic and political uncertainty that has endured for the past decade, augmented by the 2020 pandemic, it is tough to justify any aspect of business complacency. Yet it is apparent that a lack of knowledge within the accountancy profession – and a reluctance to engage with subjective advisory matters, such as government innovation incentive schemes – is selling clients short.
While the number of UK businesses making R&D Tax credit claims has steadily increased year-on-year, many companies that should be claiming are still failing to do so. Still fewer are aware of additional tax relief schemes, such as the Patent Box, and investment schemes such as the Seed Enterprise Investment Scheme (SEIS), which offers tax relief for individual investors in new, innovative enterprises.
The UK Government aims to raise R&D investment in the UK from the current 1.7% of GDP to 2.4% and HMRC allocates billions of pounds every year in support for British innovation. It is therefore frankly shocking that many professional services organisations are failing to support their clients in gaining essential financial support.
Concerns are increasing about the quality of advice and service provided from tax to audit, yet while complex, providing this advice is not rocket science. As Peter Bracey, managing director, Bracey’s Accountants insists, it’s about going beyond a black and white tick box exercise to taking an active, continuous interest in a client’s business that is the key to driving forward the Innovation Economy.
Understanding Innovation
Inward investment is fundamental to the innovation cycle, as growing numbers of UK companies are recognising; a fact that is evidenced by the increasing numbers of R&D Tax credits claims made according to HMRC’s latest statistics.
Yet the concern remains that so few companies – not just SMEs and larger organisations alike, but their professional services providers – understand the government led investment opportunities available or make any attempt to access these invaluable resources. The foundation is there; the fundamental requirement now is to place innovation at the centre of every business’ agenda – and to ensure that every company, irrespective of size or market focus, not only understands but actively explores the innovation led investment opportunities available.
The unfortunate reality is that, in far too many cases, businesses lack understanding of what innovation, indeed R&D, entails. These tax credits are not simply available to those in white lab coats. They are available for any company that develops new products, processes or services or enhances pre-existing ones. Indeed, any business turning over more than £5m will, by virtue of their size, almost certainly be engaging in some form of innovative activity.
From the construction company that has created bespoke scaffolding to fit specific features of a building without causing damage or inhibiting entrance/exit, or one that developed a method to aesthetically preserve existing walls damaged by underground running water rather than knocking them down; to the food manufacturer that has developed recipes to allow longer shelf life and for enhanced nutritional benefits; the perfumier who developed a range capable of blending different fragrances in one bottle to customers’ specific tastes; and the designer that created new methods for using parts of former Formula 1 cars in their jewellery – these are all examples of businesses that did not realise they were eligible for R&D Tax credits.
The result? Massive missed opportunities. Just consider how much a business changes year on year, particularly given the current rate of digital transformation taking place as a direct result of Covid-19.
Challenging Times
While this lack of understanding pervades, businesses are open to risk. In some cases, so-called boutique R&D Tax relief providers have popped up, with little or no experience, leading to increases in the number of fraudulent and inaccurate claims that have led HMRC to demand clear evidence around the management of intellectual property to support the claim.
In other cases, the complexity of the claims process that requires a degree of subjective interpretation has led too many smaller, generic and traditional accountancy firms to shy away from making submissions, or omitting any potentially complex areas within a submission because they lack the expertise, confidence and understanding of the nuances.
Similarly, for the many businesses that are actually claiming R&D Tax relief, the annual application process has become a tick box exercise, with each application simply mirroring those of previous years.
In all cases, the attitude and commitment of their advisors has to be questioned.
Yes, convincing businesses that they are eligible for R&D Tax relief can be challenging, but that should be the role a trusted advisor performs.
Additional Incentives
It’s not just in the area of R&D Tax claims where innovative businesses across the UK are being let down. Many of these companies will have developed parts, products, processes or services that can be patented. The Patent Box is designed to encourage companies to keep and commercialise their intellectual property in the UK. It allows them to apply a lower rate of corporation tax (10% rather than 19%) to profits earned from their patented inventions.
And then there is the Seed Enterprise Investment Scheme (SEIS), which is designed to help a business raise money when it’s starting to trade. It does this by offering tax reliefs to individual investors who buy new shares in the company and makes up to £150,000 available to young, enterprising organisations.
Yet how many businesses are being advised that these incentive schemes are accessible to them?
Supporting the Innovation Economy
In too many cases, business trust and long term commitment are being rewarded with a lack of expertise and a tick box attitude that is costing UK business millions of pounds in available and required investment.
Furthermore, this attitude is undermining business’ own attitudes to and awareness of the value of innovation. If the trusted advisor treats the process of identifying and rewarding innovation as a task that is simply too onerous, the business will likely embrace the same approach. The model could and should be very different. When the advisory team comes on site every year, speaks to every department to find out what has changed, asks penetrating and challenging questions, even encourages time where departments interact, the process can actively influence business culture.
Add in a consistent team of tax credit experts working with a client not just once a year, but continually in contact and assessing business change in line with HMRC interpretation, and the entire process is transformed. This is not a tick box exercise. Advisors should not be constrained by forms, templates and agendas: to truly understand a business’ innovation activity requires free flowing conversation and cross-department discussion prompted by experts who understand innovation investment opportunities and are confident in the minutiae of HMRC expectations.
Innovation is the key to UK business success in an uncertain global marketplace. A true trusted advisor will be prepared to engage beyond what are the black and white accounts. They will be prepared to ask some probing business questions and undertake their own research to develop the expertise that will maximise every possible opportunity for additional investment.
That is the role the profession should be performing to support the innovation economy.
