It’s no secret that the past couple of years have been tough on businesses.
In 2020, the UK’s GDP experienced a 9.8% decline - the steepest drop since records began. While there’s modest optimism surrounding the expected bounceback of consumer spending post-lockdown (and the economic benefits that come with that), the truth is, nobody knows for sure. A strong and sustained recovery is ultimately dependent on post-pandemic behaviours and the assumption that the Covid-19 virus won’t resurge.
Even with a strong bounceback, the economy will still show scars from the pandemic - the Office for Budget Responsibility (OBR) estimates a 3% overall shrink in GDP.
Feeling pessimistic? You shouldn’t be - all is not lost. Today, we’re looking at how businesses should look to utilise the UK Government’s R&D tax incentive scheme as a means of fast-tracking their financial recovery.
The current landscape
The UK Government put a number of new measures in place throughout the pandemic to support businesses. Yet, despite support ranging from the furlough scheme to guaranteed business loans, the economic impact on businesses big and small has been stark.
This quickly has a knock-on effect on business’s desire - and indeed capability - to invest in innovation. In fact, a recent survey of R&D and innovation grant holders suggested that approximately one third of firms were planning to cut their R&D spending by more than 50% at the start of 2021.
Combine this with the fact that a third of innovative businesses are planning to reduce their spend on R&D collaboration with universities, and the long-term consequences for innovation and growth become increasingly clear.
Of course, it’s not only finances that have dictated this decline in research and development. The health and safety precautions of social distancing and lockdowns have meant many businesses have been unable to access the labs and workspaces they need, which has no doubt contributed to the mammoth 65% of firms who reduced the scale of their R&D activities during lockdown.
Lessons from the past
To paint a picture of what may be to come, it pays to look back at the response to the last significant economic downturn: the 2008 recession.
According to the UK Innovation Survey (UKIS), the proportion of UK firms conducting product or service innovation fell by 26.6% in 2008. However, while the levels of process innovation also dropped across the same period, they rebounded significantly quicker than product or service innovation.
One likely reason for this is cash flow. The evidence from the 2008 recession suggests that those businesses that enter into a crisis in strong financial positions tend to emerge strongly, giving them a competitive edge. Smaller businesses therefore turn to innovative practices and processes as a means of efficiency, optimisation and, ultimately, remaining competitive.
Of course, sustaining innovation during a crisis is far tougher for smaller, cash-poor firms. This is why it pays to know what Covid-19 relief funding is available to your SME .
The R&D route to recovery
Continuing to look back on 2008, let’s take a look at the Government’s changes to the R&D tax relief scheme post-2008.
Though changes had been proposed pre-recession, the Government doubled down and pressed on with the scheme changes despite wider economic instability. This is because R&D is, essentially, an economic stimulus.
So, by broadening the eligibility criteria for the SME scheme surrounding headcounts, turnovers and asset thresholds, more businesses received more relief. And as proven by a 2009 McKinsey global survey, this mentality can pay dividends.
How R&D stimulates growth
The UK Government’s R&D tax relief scheme, first introduced in 2000, plays a major role in keeping the UK’s STEM industries at the global forefront.
It’s estimated that between £1.53 and £2.35 is generated for every £1 of tax reclaimed through the R&D scheme, with benefits ranging from the training of workers in new technologies to a greater number of jobs becoming available.
How R&D can stimulate your business’s recovery
As the old saying goes, you’ve got to spend money to make money. In times of economic unrest, though, this is far easier said than done.
Yet this is one of the greatest draws of research and development as a type of financial stimulation: any money spent comes with significant tax relief. This means that, with the right know-how, investing in R&D now can actually improve your business’s cash flow.
For example, one approach could be to retrospectively claim on eligible work as a means of optimising the benefits from one tax period to the next, helping your business to strategically meet safety milestones. Of course, this can help you to expand your capital runway and, ultimately, reach a stronger financial position.
Alternatively, you can look to proactively invest in new research and development opportunities. Of course, furloughed workforces and social distancing measures have meant many R&D projects have been put on hold, with some businesses also experiencing a significant dip in demand.
However, this actually highlights a range of new avenues to explore. For example, consider competitive advantage and future opportunity. If others in your industry aren’t conducting R&D, investing now places your business at the forefront and ensures you have the resources (materials, knowledge, skillset) for future projects.
It also presents the possibility of shorter-term advantages. For example, if your business’s internal processes or wider industry behaviours have been significantly impacted by the pandemic, investing in R&D can help you become more reactive and adaptable. The quicker you find new efficiencies and approaches in an unfamiliar model, the quicker your business can bounce back to or, in some cases, surpass its former glory.
The UK roadmap
The UK Government has issued an R&D roadmap that outlines the strategic guidelines and available support for research, development and innovation projects post-pandemic. This includes a stated goal of increasing public investment in R&D to £22 billion by 2024/25.
While this target is no doubt challenging given 2020/21’s dip in R&D spending, R&D has been notably central to both the UK and EU’s economic response to Covid-19. This includes a £1.5 billion loan and grant package for the UK’s most innovative companies, as well as additional loans and grants for fast-growing, equity-backed UK firms.
The hope is that this targeted innovation financing, combined with wider general liquidity support, will help the UK to offset the anticipated drops in R&D spending.
R&D tax credits and the UK Government’s R&D tax relief scheme will undoubtedly play a role in the recovery of businesses and the rebuilding of the wider national economy. This is a time of great opportunity to invest in people, ideas and innovation to deliver transformation and growth.
For this growth to happen, it’s important to use R&D strategically to ensure you’re always maximising value while minimising risk. For a helping hand, get in touch with the experts at Lumo to learn how we can help