The Power of SMEs Investing in R&D

Payroll and HR | 05.04.2024

by Azets

Unlocking Growth and Innovation

Larger companies tend to innovate more than SMEs, while smaller companies encounter obstacles like a lack of skilled workers, demand uncertainty, and financial difficulties. While understanding and navigating available schemes and eligibility can be challenging for businesses, approximately 17% of European SMEs are considered innovators, experiencing benefits such as improved productivity, increased sales, higher profits, customer satisfaction, and economic growth. 

In this article, we will explore how SMEs are feeling about innovation at the moment, and any red flags entrepreneurs should look out for when navigating the complicated world of innovation. 

Qualification parameters of R&D 

The premises for making a claim involve seeking an advancement in science or technology by resolving a scientific or technological uncertainty. This parameter is quite broad. However, in reality, certain businesses like core retail service industries or care home environments may not typically make such claims. Although they may have undertaken some activities that could potentially qualify, not all do. 

In theory, following the guidelines should be straightforward. However, in reality, this is not always the case. Currently, there's a reluctance in the SME environment. People are hesitant to make relevant claims they qualify for due to concerns about facing inquiries with the revenue or hindering their capital requirements. 

Fabric Nano’s approach to R&D 
Fabric Nano is a biotech company located in London. R&D is the core of Fabric Nano’s pursuit for cleaner, more sustainable ways of manufacturing chemicals and materials, and it extends throughout their operations. In 2021, over 60% of expenditure qualified for an R&D claim. 

“Our vision is a sustainable future powered by enzymes, requiring significant upfront research investment to make it economically feasible. In summary, R&D is the foundation of our work, driving us towards achieving our goals for a better future.” 
- Eliza Eddison, VP of Operations at Fabric Nano 

Benefits of investing in innovation 

The benefits of innovation are immense, shaping the future of entrepreneurship and impacting various aspects of society, politics, and the economy. Without innovation, both businesses and governments face a bleak outlook. Embracing innovation is crucial as it prevents stagnation and backward progression. We continually witness its significance, and the key lies in ensuring the right individuals make the appropriate qualifying claims following treasury guidelines. 

Advice for entrepreneurs 

  • Seek advice from knowledgeable advisors and carefully read the guidelines and legislation. Ask the right questions to determine if your current or planned activities qualify for R&D tax relief. 
  • If they don't qualify, seek guidance on how to make them qualify. 
  • If they do qualify or are about to qualify, focus on gathering robust evidence to support your claim. The key is to identify qualifying activities and then diligently document the evidence required to substantiate your claim.  
  • Avoid assuming that every new development is automatically R&D for tax purposes. It may be R&D in the context of your business, but not for tax purposes.  
  • Be cautious of being influenced by businesses pushing for R&D claims without proper evidence or understanding of the qualifying criteria. 
  • Make sure your documentation is up to date and correct, so that you can prove your claims, a clear understanding of advancements and uncertainties, and the ability to explain them accurately.

Grants and schemes 

Filing claims for grants has always been a diligent and challenging process, causing many scientists worldwide to get gray hairs. Generally, it is recommended to choose a firm that charges a flat fee rather than a commission, as this ensures they are not overly incentivized to claim as much as possible, avoiding potential cowboy practices. 

“The process of filing returns for Innovate UK grants proved more demanding than pitching to investors. Despite the complexity, we discovered that the scope of what we can claim is broader than expected, including salaries of our active R&D scientists, which accounted for around 60% of our 2021 expenditure.” 
- Eliza Eddison, VP of Operations at Fabric Nano 

External investors 

Return on investment is the primary driver for investors. While the attractive incentives like R&D schemes may play a role in their decision-making process, they are not the main reason for their investment.” 
- Tim Croft, National Head of R&D Tax Advisory at Azets  

Investors are primarily focused on maximizing their returns for their stakeholders, and that's where their attention lies. While these schemes can be appealing and can make a difference in some cases, they should not be seen as mere periphery factors. 

Seeking independent advice 

The capital allowances landscape has evolved, becoming more complex in the past decade. SME leaders should reach out to us early to discuss their future plans, allowing us to provide guidance on maximizing benefits from capital allowance incentives and reliefs. Taking a proactive approach will help ensure appropriate tax relief for your business.” 
- Gurj Sandhu, National Head of Capital Allowances at Azets 

Consequences of getting claims wrong 

Capital allowance consequences include revenue inquiries after processing claims, leading to cash flow problems if funds have been used elsewhere. Penalties for claim errors can be severe, matching the tax amount claimed. 
Seeking early advice is crucial to mitigate consequences. Specialists can help identify qualifying activities and gather evidence for your claim. Timely record-keeping is vital to avoid difficulties in proving advancements and securing relief. Working with experts from the start ensures proper documentation for a successful claim. Plan ahead for potential capital allowances and tax relief opportunities. 

The importance of innovation 

“I don't think there's any viable alternative. Specifically speaking to small businesses in the early stages of deep technology research, it's essential to recognize that not all SMEs fall under this category. For those of us who heavily rely on R&D returns to sustain months of runway, these policy changes can be quite impactful. 
- Eliza Eddison, VP of Operations at Fabric Nano 

“Innovation is the lifeblood of the economy, playing a vital role from both fiscal and social perspectives. Without continuous innovation, the economy is at risk of stagnation or decline. Innovation drives progress, propelling society forward and leading to new discoveries and advancements. Without it, the economy would face a bleak future with limited opportunities for growth and development.” 
- Tim Croft, National Head of R&D Tax Advisory at Azets 

It's never too early to talk to your accountant about r and d and capital allowances. You can ask questions such as whether your r and d activity qualifies. And what documentation or evidence you will need for a claim. Maybe there are also additional grants that you might be able to apply for. The consequences of getting this wrong can be great, so it pays to get some proper advice. Innovation is so important for entrepreneurs and the wider economy. Without innovation, there is no progress, so it's important that we keep the pedal to the metal. 

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