Innovation is critical to addressing the UK’s productivity gap and the Government supports research and development (R&D) to the tune of around £5bn a year via tax credits.
In 1986, UK firms were spending around £20bn on R&D into new products, processes and innovations. That figure has now grown to more than £37bn and represents around 1.7% of the country’s total GDP. However, it is below the OECD average of 2.4%. In Germany it is 3.1% of GDP, the US 2.8% and France 2.2%.
Businesses such as manufacturers, software developers, biotech and scientific ventures can claim tax relief on the money they invest in R&D. But according to Russell McGrath, an innovation funding specialist for tax and innovation consultancy, ABGI-UK, understanding what counts as R&D and what doesn’t is key to maximising a claim.
ABGI-UK operates across the country and is part of the global, stock-market listed Visiativ. Russell says that in the five years he has been involved in the business, awareness of R&D tax credits has increased significantly, as has the number of consultancies that have popped up to service this demand. He explains that ABGI works differently to most.
“Once you have decided how much you have spent on R&D the claiming of the tax relief is a pretty straightforward process,” he said. “However, figuring out what does and doesn’t count as R&D is less straightforward and that is where we come in.
“HMRC publishes a 500-page document outlining the rules on claiming R&D tax relief, and understanding the difference between using existing knowledge in engineering, software or science and pushing the boundaries to create new innovation, is crucial to what we do.
“Many of our competitors employ accountants, who don’t necessarily understand the R&D itself. They tend to ask the customer to work out what constitutes R&D activity and how much has been carried out, before performing the tax calculation at the end. They are effectively asking the customer to do the work.
“At ABGI our approach is different. We employ a team of scientists, software engineers and physical engineers who will actually assess the R&D work that has been done before we make a claim. It means we can spot things that others may not, thereby helping the customer to maximise their claim.”
In 2020, ABGI-UK struck up a partnership with Knowsley Chamber of Commerce to offer its service to member firms. Knowsley is home to a significant number of engineering and manufacturing SMES and the partnership is already paying dividends. In the first year alone, they helped six businesses claim £600,000 of tax relief on £2.4m of R&D projects.
“Despite the pandemic, which restricted our ability to meet with many local businesses in-person, we were still able to work closely with them and provide hands-on support,” added Russell.
“This is a credit to Knowsley’s fantastic manufacturing sector, which is constantly innovating, and the close and trusted relationship between Knowsley Chamber and the local business community.’
In his spring Budget in March, Chancellor Rishi Sunak announced a new consultation into the R&D tax credits system. He sees an increase in R&D as key to improving the UK’s international competitiveness. The Government is aiming to increase investment in R&D to 2.4% of UK GDP by 2027.
Areas it is expected to look at include the current heavy concentration of R&D claims in London and the South East. It wants to see more R&D carried out in the regions. Tax reliefs may also be used to incentivise R&D with a social value or that helps the UK reduce its carbon emissions.
Russell is very much in favour of such changes and would also like to see more regulation in the sector. He explained: “R&D tax credits are really important and they also cost the exchequer a lot of money every year. We would like to see tighter regulation of the sector and therefore extract more value for the taxpayer.
“There needs to be a closer scrutiny of the claims going in. Currently of claims that go in. As we understand it, only a small number from the total volume of claims are scrutinised in detail by HMRC. There is no common quality standard applied to advisers in this sector and we know from cases we see that there are a significant number of incorrect, or even fraudulent, claims being submitted.
“One of the grey areas is when one company decides to outsource an R&D project to another company. When it comes to claiming relief, which company is entitled to do so? Both may believe they have a legitimate claim. We need tighter regulation to address these kinds of things.
“Too many firms in our sector do not have the expertise and know-how that we do. Often the amount spent on R&D is being too loosely estimated. We are optimising the process by making a more precise calculation. We also don’t take a fixed percentage at the end. If the claim is a large one, then we are more flexible with our fees.”
Russell is pleased with the work they have done so far in Knowsley and sees more opportunities across the Liverpool city region. He added: “Our partnership with Knowsley Chamber has enabled us to bring real value to local companies which are developing prototypes or enhancing their manufacturing processes.
“Knowsley, and the Liverpool city region, has a well-established manufacturing sector and the company’s work here has so far has focused primarily in this sector. But R&D activity is by no means restricted to manufacturers and ABGI-UK is keen to work with businesses in other sectors such as digital, software, electronics and environmental protection.”