This article was first published in the July/August 2017 UK edition of Accounting and Business magazine.

At a time of unprecedented uncertainty for UK businesses, with Brexit looming large on the horizon, the take-up by companies of incentives that the government makes available to help businesses thrive has become all the more important. Evidence suggests, however, that small and medium-sized entities (SMEs) aren’t taking full advantage of the tax breaks on offer.

R&D tax specialist ForrestBrown canvassed the views of 1,000 UK business leaders, ranging from startups to larger corporations, to understand the importance of government incentives to UK businesses, and whether they are doing the job for which they were intended – that is, to encourage growth and reduce the cost of doing business. 

One incentive available to UK businesses, which is designed to encourage innovative businesses to invest in innovation but is still underexploited, is R&D (research and development) tax credits. Administered by HMRC, these reward UK businesses with either a cash payment or a corporation tax reduction for investing in qualifying R&D.

The research, Igniting Innovation, revealed that less than 6% of the smallest businesses (one to 50 employees) have used R&D tax credits, compared with over half of all large businesses (those with more than 500 employees). This gap suggests that the incentive is currently more successful at benefiting larger companies that have the resources and know-how to be able to identify and access it, with smaller companies being left behind. 

This is despite the incentive being more generous to SMEs –  which can recoup up to 33.35p for every pound spent on qualifying activities as a means to boost economic competitiveness – in recognition of the fact that innovation is costly, and cashflow is essential for younger businesses in particular. Larger companies can receive 8.8p for every pound, through the R&D expenditure credit (RDEC). 

It is not only lack of awareness and accessibility that need addressing; eligibility is also a concern. While additional government funding for R&D is of course welcome, there is more that can be done to ensure that the initiative is targeted in the right way to meet its policy intent of helping innovative UK SMEs thrive (seee box). 

With the average annual claim for SMEs at £49,000, it is well worth investigating whether your business qualifies. This amount can prove an invaluable revenue stream and, given that claims are normally processed in around four weeks, with cash being released directly from HMRC, it can have an almost immediate impact. 

For those that use R&D tax credits, the cash boost almost always funds further innovation and can become an important part of a company’s investment decision-making, which is the reason it exists in the first place. The 95% of small businesses not currently claiming this valuable incentive should look at whether and how these breaks can help move their innovative business to the next level. 

Jenny Tragner, director at R&D tax credit consultancy ForrestBrown and member of HMRC’s R&D Consultative Committee