Autumn Statement - R&D Update

The Chancellor stood at the dispatch box today and delivered the Autumn Statement.?There are many that will write more eloquently than me on the impact of personal tax changes and inflationary drivers across the economy. I'm going to focus on the changes to the R&D tax credit scheme and the potential impact for SMEs in the UK.

Those familiar with the R&D tax credits in the UK will recognise the benefits to businesses of both the SME Scheme and the larger company RDEC scheme.??Today's announcement focused mainly on the SME scheme.??

The Times newspaper has run articles recently on claims for blueberry muffins and other crazy (read "illegal") claims that definitely do not meet the definition of R&D in the UK.

There is a "Wild West" out there of unscrupulous advisors and HRMC must act to stamp these out, either through enquiry, authorisation or regulation.?We deliberately focussed Sprk Capital to only partner with a tight panel of reputable firms that we believe deliver quality advice to their clients. We were also fortunate to secure the backing of very stable funding at a fixed rate, so able to provide not only speed but certainty of finance - We've no plans to increase our interest rates for borrowers!

We have seen some companies approach us directly for funding - some of these we refer back to our Sprk Approved Advisors ("SAAs"), others we've looked at and wouldn't go near with a barge pole.?We've never written an advance without it being referred by one of our SAAs or at a minimum being reviewed by one of them.

Today saw the focus turn directly to the fraud and error in the system - this is something we wholeheartedly support - and the impact that this has had now on all SMEs engaged in R&D in the UK.

The budget took (as expected) a blunt tool approach to the cost of the SME scheme by reducing the benefit that companies can get from 33.35p per ￡1 spent to 18.6p per ￡1 (and yes, I'm oversimplifying here).

For larger companies the tax credit benefit increases from 13p per ￡1 spent to 20p per ￡1.

These changes kick-in for periods on or after 1 April 2023 and look to save the Treasury ￡815m through to the end of 2025.

R&D Tax Credits in the real world of innovation

Taking the example of one highly innovative company that Sprk has dealt with (we'll call them ABC Ltd for now), this would reduce their payable tax credit from ￡1m to ￡555k.?That's a funding gap next year for this company, who set up in the existing regime, of nearly ￡445,000.

What are this company's options now???

Reduce R&D expenditure going forward??Not great for UK growth and productivity.?

Raise more equity? Founders end up diluting their stakes and selling equity into a difficult market backdrop (I could write a whole article on this).

Outsource? Move overseas??Again, we should be looking to attract investment and employment into the UK.??

It's too early to tell the full impact of changes (literally a couple of hours old) but I'm sure it will have a real impact on investment in UK R&D by genuinely innovative SMEs.

Reducing ABC Ltd's tax credit does nothing to stop the fraud and abuse in the system.?Yes, it may offset the cost to the treasury, but surely the focus should be on recovering the amounts paid out in error and preventing this abuse going forward.

A potential solution

There is another solution (shameless Sprk Capital plug here).?Companies can now access financing against their R&D spend on a quarterly basis.?

Reinvesting these quarterly advances into R&D allows them to compound the benefit of their R&D benefit and partially offset the reduction in the SME rate of tax relief. This is typically referred to as a R&D Tax Credit Advance or R&D Tax Credit Loan - or as we refer to it a "Sprk Advance".

The benefit of a quarterly Sprk Advance would increase their available R&D spend by over 10% without reducing their R&D tax credit. This enables companies to reinvest more into R&D and power innovation for SMEs.

For ABC Ltd not only have they now increased their R&D budget by over ￡100k but also marginally increased their net payable credit after all Sprk fees and interest. Effectively it has cost them nothing to finance ￡100k of additional R&D.

This is a true non-dilutive source of funding now for this business and can also reduce their requirements to raise additional equity.

Looking to the future

The past few weeks have seen witness statement to Parliamentary committees on the impact of R&D on the UK and specifics around the SME scheme.?We've seen some amazingly eloquent performances and some not so (I say whilst frantically re-checking the Sprk website...).

There is a consultation now on combining the two different R&D schemes under one umbrella, hopefully this will make the system more transparent and understandable for companies.

We must continue to invest in UK Plc to make it a place where companies innovate and thrive.?The tax credit system is key to this and vital to the cashflows of many genuinely amazing companies that are breaking boundaries, creating jobs and powering the R&D agenda of the UK.

The "Cowboys" can't take over the ranch here.??

In the word of Rawhide, "just rope, and throw, and brand 'em" ...this time for what they're doing - forcing through marginal (at best) claims that take advantage of a system and creating a perception which damages the reputation of the scheme. This has resulted in cuts that may stifle true R&D and innovation in the UK by SMEs that are powering tomorrow's world through their actions today.

Dom Peasley is the CEO of Sprk Capital, a FinTech lender that provides finance against R&D Tax Credits and Innovation Grants to companies allowing them to invest and grow.