Take up of government research and development incentives is set to double in Bristol over the next three years as more businesses use them to boost innovation and stimulate growth.
According to research by Bristol-based R&D tax credit consultancy ForrestBrown, the incentives have already had a positive impact on the city with many three-quarters of those using them saying the outcome was higher than they expected. 
However, the research also found that a lack of awareness and understanding of the tax credits could be preventing more companies from claiming.
ForrestBrown’s survey of business leaders is the first in nearly 10 years to examine the specific impact the incentive has made on UK plc. It assessed companies’ appetite for innovation and the barriers affecting decision making.
The results from firms in ForrestBrown’s home city, showed R&D tax credits had allowed companies to sustain or, in many cases, advance their innovation efforts.
Among the findings were:
- 38% directly increased R&D activity as a result
- 63% hired new staff as a result of R&D activities
- 13% reinvested the funds into new product development
The study, A Nation of Innovators: A report on business attitudes to research and development, was conducted by ForrestBrown in collaboration with Management Today magazine.
It precedes annual data from HMRC on the incentive’s uptake, which is expected to show another increase in claimant numbers when published next Thursday.
The survey gauged the views of senior decision makers in small and medium-sized enterprises as well as large corporates.
Some 32% of Bristol-based respondents said they were aware their business had claimed for R&D tax credits, while 56% said they planned to do so in the next three years – showing a significant increase in claimants can be expected in the near future and that R&D activity in Bristol will increase.
Financial constraints were found to be the chief barrier to innovation for many – with 78% citing lack of finance as an obstacle to ongoing R&D. However 75% of those that had claimed the tax credit incentives said they were important to their company’s overall financial position, with a quarter saying they were ‘very important’.
ForrestBrown said the incentive’s impact on individual businesses had been greater than anticipated.
Of those who have claimed, 75% said the benefit – either in the form of a cash payment and/or corporation tax reduction – was higher than they expected.
ForrestBrown founder and managing director Simon Brown, pictured, said: “Bristol is a city at the forefront of innovation, so it’s exciting to see that cash savings delivered via R&D tax credits are being put back into Bristol businesses to kick-start exciting new R&D projects.
“This can only further enhance the city’s reputation as one of the most pioneering in the UK. We have more than 350 clients in the South West and these businesses are using R&D tax credits to grow and in turn boost the sector they operate in.”
Despite the incentive’s growth and positive impact on Bristol businesses, it remains an untapped resource.
Some 92% said their business planned to innovate in the next three years, but only 56% planned to use the incentive in the same period.
With the most recent government figures on the incentive’s uptake, published last September, putting the total UK benefit paid for 2014-15 at £1.7bn, the financial cost of under claiming, or not claiming at all, is significant, ForrestBrown said.
The study also unearthed a lack of awareness and understanding of the incentive, which could be contributing to its under-use.
Despite a broad range of R&D activities being eligible for tax credits under the incentive’s rules, most businesses are unclear on what qualifies, which means they could be claiming significantly less than they are entitled to.
Some 64% were not aware that R&D work relating to changes or modifications to an existing product is eligible, and 12% considered projects undertaken on behalf of a client to be outside of the incentive’s remit.
Almost a quarter (24%) of respondents did not know they could include unsuccessful R&D in their claim, while 41% did not believe their business engaged in any R&D activity whatsoever.
Even those that had claimed were unclear on the incentive’s rules around permissible R&D activity, with almost half stating a clearer definition of R&D for tax credit purposes was required from the government.
Aside from eligibility, further barriers to claiming were highlighted by the survey. Twelve per cent did not know how to go about claiming, and 18% were not clear of the potential value of doing so.
Half of the Bristol businesses surveyed said that better scheme guidance from HMRC could improve the incentive.
Simon Brown added: “We can see quite clearly from the research that a relatively large number of businesses are not making use of the incentive, which is a missed opportunity to diversify income amid post-Brexit uncertainty that might impact a business’s cashflow.
“A number of businesses we work with in Bristol and the South West came to us having been told by their advisers that they would not qualify for R&D tax credits. But based on experience, it’s difficult to think that a business investing in innovating their products, processes or services wouldn’t undertake some level of R&D.
“This report highlights the success of the R&D tax credit incentive in meeting its policy intent to boost the UK’s productivity, but has unearthed key areas where further work is required to educate senior business leaders about the vital role R&D tax credits can play in business growth.”
Bristol firm e3 Media is among those to successfully use the tax credits. One the UK’s largest independent digital marketing agencies, it has used R&D tax credits since 2013 to recoup investment in a number of innovative web development projects undertaken for clients.
Managing director Neil Collard said: “It wasn’t immediately clear whether R&D tax credits would be applicable to the work we do, but we looked into it further and were quite surprised by the amount of our activity that was eligible and was classed as R&D.
“Using the scheme has been hugely beneficial to us. The cash we received has put us in a strong position financially. We put the money towards acquiring a business in London, which meant we didn’t have to go to the bank to borrow anything. Innovative companies in our sector who haven’t yet used the scheme could be missing a trick.”
