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03 AUG 2020

SURVIVING A CORONAVIRUS RECESSION: R&D TAX CREDITS AND RECOVERY

The imminent coronavirus recession will be a peculiar phenomenon: an expected economic downturn.

In this post, we’ll look at what businesses are asking for help with now in their bid to bounce back quickly from the impending recession. By looking back and examining the last recession, we can learn how businesses diversified, survived and - in some cases - even thrived in an economic downturn.

How long or deep the coronavirus recession will be is guesswork - a ‘known unknown.’ But there are some things we do know: In a recession, sales dry up, and capital becomes scarce as reserves dwindle then empty to replace lost revenue. Investor confidence plummets. There’s fewer hires, wage stagnation and redundancies.

But even as economic forecasts become gloomy, the most resilient forewarned businesses are already planning to endure-then-succeed using the government’s R&D tax incentives.

What businesses are worrying about

In a recent survey of 500 SMEs, the UK200Group found that only health and safety ranked above cashflow concerns for businesses emerging from lockdown. Finding new reserves or additional income has never been more urgent.

The government offered a package of up to £330bn of loans from banks but these have been slow to materialise, with a number of challenges along the way. Initially, there were reports of banks demanding personal guarantees and imposing onerous interest rates of 30%.

Meanwhile, in a webinar broadcast on LinkedIn, HMRC's first permanent secretary and chief executive, Jim Harra, fielded questions from concerned businesses and the self-employed. Again, there were some who voiced frustration about access to funding. But this time there were also worries about the longer-term cost. Initially to the treasury, then to the taxpayer and then to the UK economy. Mr Harra confirmed this enormous expense.

As of May 21, 2020 (just one full payroll since introduction), one million employers had claimed furlough relief through the coronavirus job retention scheme (CJRS) for eight million jobs, costing £11bn. This figure in addition to the £8bn bill of the equivalent self-employed scheme.

A timeline for tapering the generosity of then closing the government’s Coronavirus job retention scheme has already been announced. Given the cost of all these measures, it’s likely that the government will look to reduce all of them as soon as it can reasonably do so. When that happens, based on the sheer number of businesses currently seeking government support, and the amounts being claimed, many will struggle.

How to survive a recession: key learnings from 2008

What can the 2008 economic downturn teach us about business resilience this time around? You have to adapt and innovate to grow.

Don’t stop investing in your future. Though it may feel counter-intuitive, that was the key takeaway of an erstwhile 2009 global McKinsey survey which found R&D remained a strategic priority for executives even in that most turbulent time.

R&D is an economic stimulus. That’s why governments tend to double down on R&D tax incentives in times of economic downturn. Consider the changes made by the government to R&D tax credits in 2008.

The changes made were all planned prior to the crisis, but they chose to press on with them as planned despite the downturn. The eligibility criteria for SME relief (headcount, turnover and balance asset thresholds) all doubled, bringing a huge number of new businesses into the more generous SME scheme, at the same time as an increase in the rates of relief.

By 2009, the recession was in full swing, but the same year saw changes to qualifying indirect activities and intellectual property which both resulted in increased generosity. Although these were smaller changes, they continued a positive trend of supporting the R&D incentive during recession.

How to survive a recession with R&D tax credits

The benefits of R&D tax credits can help your business survive a recession:

  • Significant and transformative sums
  • Increase your capital runway
  • Debt-free
  • Invest in skilled staff or pay for expensive materials in further R&D projects
  • Use strategically to reach milestones. Optimise the benefit from one tax period to the next, plotting a course to safety

How R&D tax credits can unleash Britain’s growth potential

The R&D incentive itself was introduced in the year 2000 to try to boost the economy via key STEM industries. Today, R&D tax credits are a key part of the government’s Industrial Strategy.

The wider UK economy benefits from increased spending on R&D. A HMRC study found that for every £1 of tax forgone, between £1.53 and £2.35 of additional R&D is stimulated. This spending takes the form of training or re-skilling technicians for advanced technologies and creates new jobs too.

Heading into a coronavirus recession and out of Brexit, this is a key time to protect high-skilled UK jobs. The Budget 2020 ushered in new era of R&D investment and the government has established five key working groups to help unleash Britain’s growth potential. These are: Business innovation, green technologies, start-ups, skills, and global investment.

Given that R&D tax credits can assist with all of these aims: it’s our strong conviction that the government should increase the generosity of the UK R&D tax incentive once again.

Will a COVID-19 recession impact existing R&D tax credit claims?

With so much uncertainty, it remains to be seen what the longer-term impact of the anticipated recession will be on R&D spending, and therefore R&D tax credit claims.

In the very short term, we have seen more businesses seek support to prioritise their R&D claim submissions. These submissions won’t see values impacted, as claims are retrospective, so relate to periods prior to lockdown.

Many businesses have also been smart enough to consider their R&D claims alongside the other COVID-19 funding measures, so that future R&D claim values are protected.

In the longer term, we do expect to see some businesses report lower investment in R&D, even if only for the lockdown period itself. The absence of furloughed staff could mean R&D projects have had to be put on hold, and companies whose clients are in the worst affected sectors will have seen a dip in demand.

But others are adapting fast to the ‘new normal’. Remote working has spurred many businesses to fast-track digital transformation projects and others are looking to the new consumer demands that such drastic changes to our behaviour might create. Based on history, we’d expect these businesses to be better placed to weather the coming recession.

Awareness of these ramifications of Covid-19 has led companies to seek fast advice. Not all of that has been good advice.

It’s clear that R&D tax credits, whether in their current form or adjusted, will play a significant role in helping businesses survive the recession and rebuild. The wider UK economy will also rely on them for its recovery. Having said that, it is more important than ever for businesses to use the incentives in a strategic way and to maximise their value whilst minimising risk.

ACE affiliate ForrestBrown are experienced at working closely with businesses to use R&D tax credits to deal with the specific challenges they face. If you need strategic advice in turbulent times from a quality R&D tax credit adviser, contact them today.

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The UK’s largest specialist R&D tax credit consultancy, with a multi-disciplinary team of chartered tax advisers, engineering specialists and former HMRC inspectors, they're passionate about how R&D tax credits can help engineering businesses grow.

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Adam Kotas

Adam Kotas

Director

Adam is a R&D tax consultancy, and ACE affiliate, ForrestBrown.

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