There’s never been a better time to innovate.
In this challenging and uncertain economic climate, investing in innovation is an invaluable way for businesses to build resilience.
02 December 2020
And according to Shellye Archambeau, CEO, Board Director and Silicon Valley leader, in an excellent article she recently wrote for Forbes, crises and recessions are great times to try something new, and there has never been a better time for business to take risks.
The period immediately following the crash of 2008 was a difficult time for innovative businesses in the UK, as it was in most developed markets. Why is this then, that the years immediately following the recession saw the launch of some of the most famous companies today? (WhatsApp, Instagram, Uber, Slack). Robert Fairlie, an economics professor at the University of California Santa Cruz, terms the phenomenon “necessity entrepreneurship".
In the wake of the Covid-19 pandemic, businesses should be embracing necessity entrepreneurship, and look at pain points as an opportunity to create novel and productive solutions. And as Archambeau puts it "Risk and reward are two sides of the same coin. If you avoid taking risks, you limit your opportunities. Now is a great time to take risk because if it doesn’t work, you can just throw it into the “Covid-19” bucket … and then flip another coin."
This is, of course, easier said than done at a time when many companies feel that investing precious cash and resources in R&D or innovation isn’t their top priority.
Luckily for UK businesses, in times of crises and recessions there is usually an explosion of sources of funding supporting innovation; the government keen to encourage companies to develop new products and services through innovation and technical risk-taking, in an effort to improve the UK’s resilience to future disruptions, global competitiveness and maintain consistent economic performance.
The range of sources currently available means that it is now much easier for companies to secure adequate and appropriate funding from the start to finish of a project, stimulating them to take more risk, innovate, try new things...
From early-stage project grants, to commercial funding (such as loans, asset finance or equity investment) for projects at a more advanced stage, through to R&D tax relief and finally Patent Box for companies developing IP through an innovation project, there are many ways to offset some of the financial risk posed to innovative SMEs.
Generally, grant funding is a valuable source at the start of an innovation project when it may be difficult to secure commercial backing as a consequence of the magnitude of technical risks bring faced and the likelihood of potential failure.
The key would be finding the most appropriate source of grant to meet the project. State aid grants, such as Horizon 2020 or SMART tend to be focused on larger scale and more technically challenging projects. De minimis funding (more often available through local business support programmes) provide smaller amounts of money, but are more easily accessed, with less stringent application processes and quicker decision cycles. These can help companies with smaller, less technically challenging projects.
Management teams need to weigh-up the amount of time involved in putting together a robust grant application with the likelihood of success. Many of the larger grant sources are competitive in nature and often oversubscribed with applications, meaning not every request, even good ones, will be successful.
Commercial Funding is another support mechanism for innovation, ideal for many projects at a more advanced stage and closer to market readiness.
While commercial funding takes the form of equity investment or loans and does require to be repaid, it also offers more flexibility than grants with fewer conditions attached.
Companies accessing commercial funding must typically provide security against the lending. For early-stage growth companies which lack traditional fixed assets, we are seeing an increasing trend of companies securing loans against their intellectual property: design rights, patents, copyright and even software assets.
With one bank now offering loans secured against software asset and another funder securing loans against a range of intellectual property forms, these options do provide alternatives to the traditional forms of secured lending.
There are also a few equity investors focused on investing in new technology ventures where there is identifiable intellectual property combined with clear market opportunities.
R&D TAX RELIEF
The UK Government’s R&D tax relief scheme also continues to provide financial benefits to companies investing in innovation, taking risks through the resolution of technical uncertainties. While the level of relief will be impacted by use of grants, the benefits of this incentive can often be significant, especially where there has been significant R&D spend.
The effect of an R&D tax claim is to increase cashflow by reducing taxable profits or increasing taxable losses. There are three main types of tax benefit that arise from a successful claim for R&D Tax Relief – these are 1) a payable cash credit, 2) a rebate of corporation tax and 3) an enhanced deduction that can be carried forward.
SMEs can claim up to 33p for every £1 spent on qualifying R&D activities. The exact rate of relief you receive will depend on your Corporation Tax position, and whether you are profit or loss-making.
Companies which have been fortunate enough to develop intellectual property through an innovation project for which they’ve secured a patent can also benefit from Patent Box relief. This scheme offers a reduced corporation tax of 10% on all profits directly attributed to the commercialisation of the patent itself.
The Patent Box is available not only for patent owners but also those who hold an exclusive licence to a patent.
What’s more, once you have elected into the patent box scheme you can claim this relief on profits over the life of the patent.
AND you can claim both R&D tax relief and Patent Box at the same time. The Patent Box is not state aid therefore R&D tax credits can still be claimed. In fact, for companies who invest time and money on eligible R&D, AND also hold qualifying IP, the two tax relief schemes can be extremely beneficial.
THE BENEFICIAL ROLE OF TECHNOLOGY
As Archambeau shrewdly points out, companies willing to adapt and grow through the pandemic "should dive even more deeply into the beneficial role of technology".
Modernisation through digital transformation is the key to cutting costs from processes AND making businesses more responsive and resilient in challenging market conditions.
Conservative estimates indicate that applying digital technology and analytical tools can lead to efficiency gains in the range of 40% - 50%, with some companies reporting cost savings between 5% and 10%.
3D CAD software tools such as Solidworks can manage all aspects of the design process from initial design, to costing, testing, proof-of-concept, direct 3D printing/manufacturing output, technical documentation and marketing materials.
As we face an uncertain economic outlook through restart and recovery, it is essential that innovation does not fall by the wayside. By accessing the wide range of technology and support available, from the inception to the commercialisation of innovation projects, UK businesses can ensure they continue to be competitive in the global market.
ABGI-UK can review your projects & processes, identify all activity eligible for innovation funding, and advise you on how best to kickstart your digital transformation journey. By doing so, you can be certain your company is taking advantage of all available opportunities to strengthen its financial position.