All is not well in the world of business. Forget the headlines about a new Chancellor, or even the U-turns on Corporation Tax. One of the biggest problems for many of the most innovative UK startups has been a dramatic increase in delays receiving their R&D tax credit payments.
Since July 2020, HMRC has been looking a lot more closely into the merits of R&D spending claims. Although their aims are laudable – to fight fraud and save taxpayer money – civil servants have been spending a lot more time checking the applications of all businesses, both bad and good. The approval windows have increased from 28 up to 40 days, which is already a major problem. But it’s actually even worse than that, as even when approvals are given, HMRC has been painfully slow at actually issuing the tax credit payments.
This has created major cashflow problems for startups, sometimes even forcing layoffs. After a company’s financial year has been completed, it can submit an application to HMRC for a R&D tax credits. These then typically took 28 days to process, with the payment made within just a few weeks. From spending on R&D to receiving the tax credit payments can thus take over a year.
But even the smallest delays can be critical for startups, because many of them take out loans using the expected credit as their security, in order to help their cash flow. As such, both HMRC’s own processing delays, along with post-processing delays in receiving payments from HMRC – some reportedly delayed for up to five months – create a very real cost to businesses in terms of the interest payments they must continue to pay for their loans. And in cases where HMRC decides not to pay out the full amount being claimed – often with minimal warning or communication – it can be game over for a startup.
What is the cost of these delays to startups? We can estimate this with a quick back-of-the-envelope calculation by taking the typical interest rate offered on R&D tax credit loans, and treating this as a proportion of about 80% of the total amount awarded in R&D tax credit payments each year – roughly the amount that most R&D tax credit loan providers seem to be willing to give. Not all startups will actually take out the loans of course, but the market interest rate tells us the opportunity cost faced by all startups who partake in the scheme. Just because they don’t always actually take out the loan, doesn’t mean they don’t also suffer costs from the same lack of cash flow.
For 2020-21, HMRC paid out £6.6bn in R&D tax relief support, so we are looking at a total market for R&D tax credit loans of about £5.28bn (80% of that figure). The loans themselves often vary in duration, but typically charge a loan facility fee of about 2.5-3% followed by an interest rate of 1.25% per month. Given this monthly interest rate, and generously assuming that total delays have averaged only an extra two months, the total cost to UK startups and small businesses is in the order of £132m – and probably higher, especially if they have been forced by delays to take out new loans to tide them over, incurring more rounds of loan facility fees.