Now that I have had some time to digest the recent update from HMRC in respect of the R&D tax credits and Patent Box statistics, there are three things that have stood out for me:
Why is qualifying expenditure going backwards?
The increase in relief was 15% but qualifying expenditure was up only 8% which concerns me. One reason may be that more companies moved into a loss-making position where the relief is more generous. Considering the retrospective nature of these stats this does not paint the best of pictures of the UK economy even BEFORE we drop into the recession caused by Covid-19. The other possible reason is more of a challenge around the effectiveness of the scheme. The whole idea of the relief is that investment from government builds on the R&D investment from businesses themselves.
So as the support increases, we should be seeing qualifying expenditure increase otherwise it will be a fair question from critics of the scheme as to if it’s working. Personally, I think it’s more around the methodology of the numbers that’s an underlying issue but it is a headline fact that others may drill into.
Why does it surprise me? In our client base of circa 1,000 businesses of every size and industry, we saw our clients qualifying expenditure grow by 13%, and generally speaking, we saw other R&D projects happening across the businesses that had not been considered previously.
Continued increase for new claims and small claims but where is the Intellectual Property?
It is good news for all that startup businesses have R&D on the mind from day 1 and have it in the fabric of the business. The largest growth of the scheme is smaller claims and new claims and I think we must acknowledge the education from, and more proactive role accountants have played to achieve this increase. But there is a fatal flaw – R&D tax relief is not in its intent good tax planning, but an investment in innovation and there is very little evidence that the early-stage R&D is taking intellectual property (IP) seriously.
The R&D roadmap defined Innovation as the commercialisation of R&D, well, if early-stage businesses do not have IP in the fabric of the conversation we will fall at the first hurdle. Not only do the Patent Box statistics make this point and that there is very little take-up from the SME community, the Intellectual Property Office statistics of new patents filed and granted is still woefully low. Knock out patents from the largest businesses in the world and for university research, we are left with a handful of businesses really buying into patents.
Could this be an opportunity to review the effectiveness of Patent Box and how it needs to change to support SMEs? I hope so.
Are financial services actually leading the way in terms of software patents?
From the Patent Box stats, a number that sticks out is that there are only 10 financial services companies making a Patent Box claim but they take a massive 35% of the benefit – £350m! I think it unlikely that their patents are related to mechanical and engineering technologies so we must be thinking that those patents are routed in software technologies. This could be the poster child for software patents and to dispel the myths that it is impossible to patent software. It is essential for our digital economy that we change the narrative around patents and that we make it a commercially focused, value add conversation.
From our innovation nation research, the barrier to entry to IP is potentially a skills shortage and cost, so I take the point that large financial services businesses have deep pockets and endless resources but that doesn’t need to be a barrier. The opportunity is to start with a good R&D tax report, it potentially holds all the gems and potential value that make an IP conversation focused and cost-effective.
What do we want to see next year? Let’s continue to see new claims from younger businesses and if we can get the education right, we will also see more activity at the patent office. If I were in government, I would be looking at the R&D roadmap research and focus on one single thing – the spillover effect of R&D. This is the biggest payback to investment in R&D so let’s get our heads out of the R&D tax credits conversation and stand back and ensure that the incentives on offer not only help businesses start and invest but give the best chance of long term prosperity and economic value creation.