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Dom Hallas

Executive director of The Coalition for a Digital Economy (Coadec)

To build world-beating startups, we need a world-beating R&D Tax Credit

Startups are being denied the right to claim rebates for a range of technologies integral to innovation, writes Coadec’s Dom Hallas

Britain has an R&D problem. We rank 11th in the EU and 19th in the OECD according to the latest spend data. The government has a 2.4 per cent of GDP target for R&D spending, but in practice it has been virtually flat at around 1.7 per cent for years. Yet in Germany and Denmark R&D spend runs at over 3 per cent. In a post-Brexit world, for the UK to be a high-growth, high-productivity, high-wage economy – this must change. And startups will need to be leading the charge.

So to do just that, at Coadec we have published a new paper urging the government to improve the R&D tax credit – the critical incentive for early stage companies investing in their research and development.

The government’s R&D Tax Credit is a fantastic scheme. It serves a community of innovators in a way that not many government schemes can. There are lots of grants and pots of money run by the alphabet soup of government quangos, but the credit is the best scheme for a typical startup, which gets a tax break and much needed cashflow back for the critical work that goes in before successful products come out. Some 69 per cent of founders we surveyed described the credit as very important to their early stage survival. At Coadec, we get to see this first hand. We are fortunate to be able to work every day with founders of startups who benefit directly from the credit, and see the incredible things they are able to create with its help.

But being involved with these startups we also get to see first hand the challenges these companies face as they work on the claims. Founders who have a great idea and vision for their company, but who don’t know where to start with claiming the relief they deserve; who wouldn’t know where to look; or who couldn’t interpret government even if they did. We need an approach that doesn’t punish startups that can’t navigate the vagaries of government – and instead helps explain the value of the credit and simplifies the process as much as possible.

Then there’s the criteria of the scheme (aka what can and can’t be claimed for), which means that even with the help of costly accountants, innovative companies don’t really get to claim for their true research spend. In our survey, 68 per cent of startups considered use of cloud storage a key R&D cost, and 82 per cent said they thought of user interaction or user experience development a core part of their development process – but it’s extremely hard to claim for either. Not only that, but AI startups find themselves unable to access the credit for the cost of the data sets they need to train their algorithms – unlike their counterparts in Denmark & South Korea.

Companies should be able to claim for all of these. Right now, what the scheme covers doesn’t reflect the modern research costs of a tech company – it’s a lab coat style system for a skinny jeans and trainers age. We need a world-class R&D scheme that reflects this new reality.

All in all then, it’s pretty simple. We know that R&D is going to be critical for the future of the UK economy. We know that startups with limited capital need to invest early to be able to build world-beating products. And we know that the system needs to be updated. Whoever is in Number 10 in a few weeks time – it might be high time for a rethink.

Dom Hallas is executive director of the Coalition for a Digital Economy (COADEC)