R&D tax relief can support innovation during recession

Eilidh Hobbs, supervisor in Chiene + Tait’s R&D Tax Relief team

by Eilidh Hobbs, Supervisor in Chiene + Tait’s R&D Tax Relief team

Most, if not all, businesses have felt the impact of Covid-19 in some manner. Some have benefitted from a surge in demand for the goods or services they provide during the pandemic, including e-commerce, home entertainment and pharmaceutical sector companies, but many others have been hit hard.

For countless businesses across Scotland, the past six months have been all about survival as we await a new normal to emerge so we’re able to rebuild our economy. This has forced many companies to move their focus away from long-term strategic planning to concentrate on day-to-day matters that will help deliver short term cash flow.

In an effort to support business through the worst of this crisis, the UK Government has introduced a number of temporary schemes and incentives, including various loans, the deferral of VAT and the Job Retention Scheme.

R&D tax relief, a government initiative introduced in 2000, also has an important role to play during these challenging times. This measure has been hugely successful in incentivising UK companies to invest in innovation. An HMRC review in 2015 reported that for every £1 of tax forgone by the UK Treasury through the scheme, businesses had spent between £1.53 and £2.35 on R&D activity.

These measures also significantly benefit businesses. The most recent figures show Scottish companies secured a total of £175m in R&D tax relief. For many small firms and a number of larger companies, the rebate they secured had a positive impact on their cash flow position and enabled further investment towards the growth of the business. Two of our clients, Speech Graphics and ClinSpec Dx are prime examples of this.

Edinburgh-based facial animation software specialists, Speech Graphics, secured R&D tax releif through its investment into developing Speech Emotion Recognition (SER) technology. SER can automatically recognise human emotion and affective states, including facial expressions and other non-vocal actions, from audio alone.

This investment, which is important for enriching human-machine communication, not only builds on the reputation for innovation that Speech Graphics has established, it also generated a significant tax rebate to support the company with its next round of pioneering speech science projects.

Meanwhile, Glasgow life sciences firm ClinSpec Dx secured R&D tax relief for its investment in developing novel spectroscopic methodology and hardware for blood serum analysis. This highly innovative process allows same-day detection and grading of a range of diseases, with first applications in brain cancer. ClinSpec Dx’s success achieved so far on this ground-breaking project is further bolstered by a significant tax rebate which can help facilitate further world class research and development activities going forward.

At a time of economic turbulence, many companies might think that putting money into innovation-focused activities is counter-intuitive but support from the R&D tax relief scheme can help in making this investment viable. Furthermore, many companies are already carrying out legitimate R&D activities but have not considered claiming tax relief in the mistaken belief that they wouldn’t qualify for it.

The range of businesses that do qualify are, however, broad and varied. In fact, HMRC’s criteria for qualifying R&D tax relief projects applies to all industries and to any business seeking to achieve an advance in a field of science or technology, and in doing so is required to overcome scientific or technological uncertainties.

A claim can result in a generous cash tax credit, or a reduction to a company’s tax liabilities. At a time of major uncertainty, investment into innovation will be critical for many Scottish businesses and will also drive forward economic recovery. With the UK now in a coronavirus-fuelled recession and facing the prospect of a No Deal Brexit, R&D tax credits remain an effective tool to support the ongoing drive for world class innovation.

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