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A how to guide when investing in R&D.

The UK’s tech sector is developing at a rapid rate, and in fact is growing 2.6 times faster than the overall economy. This kind of growth not only highlights the success of the industry, but also its competitiveness.

About the author

Iain Butler

+44 (0)20 7556 1343
butleri@buzzacott.co.uk

Being a scaling tech company at times can seem like competing in a very fast contest and keeping ahead of your competitors is never easy.

It’s vital that scaling technology companies are able to develop and bring their ideas to market, and fast. This means taking full advantage of the R&D funding available. But how do you do it? Let’s explore three essential elements for when investing in R&D for your business. 

Hiring the right talent
Getting exactly the right person is difficult and they tend to come at a premium. When budgeting for a new member of staff, consider the impact their salary might have on an R&D claim, as this could make the decision to recruit a senior resource more bearable. 

The other long-term option is to recruit for the right attitude at a junior level and invest in training to provide them with the necessary skills to elevate them to where the business needs them to be. Unfortunately, R&D incentives cannot help here, but it is worth considering whether there are any training related grants that could be accessed to help fund this route. 

Once you have someone on board, now is the time to look at other incentives to retain them such as share options and share schemes. Time and time again businesses make mistakes in setting up share incentives that either disadvantage the individual by increasing their tax liability, or disadvantage the company by giving away too much before the individual has fully bought into the role. 

Receiving external expertise
When you can’t find the right staff for your business, engaging a subcontractor could the right approach. Bringing in an experienced developer or specialist on a short-term contract could kick-start the development. This individual’s costs could be claimable within your R&D claim, however, you will only be able to pick up 65% of their costs. If this individual remains at the business for an extended period, the company must consider IR35 implications and whether they have created a disguised employment contract. 

Alternatively, when it comes to subcontracting, there is the option to pass elements of the development to a third-party company in the UK or overseas. We are seeing companies using teams in India and Vietnam when labour costs are lower. But this approach requires careful management and monitoring to ensure the subcontractor is progressing as expected. Again, these costs might claimable within your R&D claim however, you will on be able to pick up 65% of their costs.

The big risk with subcontracting work is to ensure that the IP remains with your company and you do not end up with a third-party having unexpected rights when you come to see the product. It is tempting to rush into a third-party development at a low cost or no cost in return for shares. Before entering into any contract, it is worth reading the Innocent Smoothies copyright case as a warning about what can go wrong. 

Another point to consider is that HMRC is planning to introduce a PAYE/NIC cap for the cash back element of the SME R&D tax credit. This is likely to be introduced in April 2020 and companies need to ensure they have a balanced mix of salaried staff and contractor arrangements to prevent the cash back been restricted. This means founders will have another factor to consider with the interaction between salary, dividends and R&D tax credits when setting up their business. This implies that start-ups should be factoring in their R&D claim into cash flow, rather than treating them as a nice add-on. 

Understanding what equipment qualifies for R&D
Most tech businesses want to minimise their purchases of equipment and to use services provided by AWS for example. This is indeed a cost-effective and secure way to move forward, but businesses shouldn’t expect their R&D claim to assist in funding this expenditure. 

This is the most common mistake we see companies and their advisors making in assuming hosting costs are claimable. 

Until we have a thorough review of the SME scheme and HMRC accepts that hosting and data costs are part and parcel of a tech business’s utilities expenditure, these costs are excluded. 

Investing in your business’s future
If the UK is to continue to foster develop its vast technology market and become the innovative economy that it so desires, our tech companies need to be able to take advantage of the funding and incentives available. Having a clear understanding of what elements support your business’s R&D, from the right talent both inside and outside the organisation will be key. 

Ultimately, tech businesses that are able to understand and utilise R&D tax credits as part of the overarching business strategy, will ensure that they underpin, rather than undermine, growth.

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