British startups are facing cashflow crunches thanks to major delays in R&D tax relief payments from the government, Sifted has learnt.
“I can categorically say there is a national issue with R&D tax credits right now,” says Adam McCann, cofounder and CEO of Claimer, a startup that helps other startups and scaleups apply for R&D tax relief.
“It's almost like a lottery,” says Bill Liao, general partner at SOSV, a deeptech VC. “Some of the companies in my portfolio have gotten their tax credits on time. Some of them have had their tax credits reduced without any conversation as to why and some are waiting for a seemingly indefinite period of time.”
It’s something of an own goal for Brexit Britain — and has left some startups on the brink of bankruptcy.
A 'tech superpower' struggles
After Brexit the UK government pledged to become “a science and technology superpower” by 2030. The R&D tax relief scheme was one incentive to encourage scientists to commercialise their research.
The scheme, which has been running successfully since 2000, allows founders to claim back part of the money spent on R&D, including payroll, contractors, software and prototype materials, as a tax relief or a cash credit.
Small businesses (SMEs) can typically get back between a quarter and a third of their R&D spending — which is a meaty contribution to a small startup's budget.
But a recent move to more scrupulously check R&D claims has led to delays in payments. This has in turn affected the cashflow of startups, which have been waiting for the money for far longer than planned.
“It's obviously totally inconsistent with the government's wider, much-talked-about aims of promoting entrepreneurship and building tech,” says one founder who's been affected by the delays.
“People think that innovation, inspiration, invention, is the big challenge,” says Liao. “No: the big challenge is actually turning that into a product and getting that to fit the market… If you fail in supporting the people doing the hardest work, there is no way you are going to end up with an advanced technological outcome.”
Delays in payments
In March Rishi Sunak, then the UK chancellor and in charge of the country’s spending, decided that the country’s £7.7bn financial scheme for innovation needed to be overhauled amid fears that it wasn't delivering value.
In July, HMRC — the British tax authority — started to look more closely into applications to check the merit of their R&D spending and fight fraudulent claims. That's meant civil servants spending much more time checking applications, and the logjam has led to the body extending the approval window from 28 to 40 days as an emergency measure.
“We’re making extra checks on R&D tax credits claims to protect the public purse, due to an increase in concerning claims,” an HMRC spokesperson tells Sifted in a statement. “We’re still processing the majority of R&D tax credits claims within 40 days and aim to return to our usual service as soon as we can.”
But according to McCann, that deadline doesn’t include the time taken to actually pay out, which in reality makes the whole process even longer — it can now be months from application to payout.
“Over the past few months the majority of R&D tax credit payments have been paused or significantly delayed. This has affected the entire country,” says McCann, who's joined forces with other claim service providers to lobby HMRC. “We saw up to a 90% drop in the number of payments being issued. More are coming through now, and the delays are reducing, but the situation is nowhere near back to normal yet,” he adds, stressing that HMRC doesn’t provide any timeline on when the situation will stabilise.
The payment delays are putting many startups in an unstable financial situation.
Fady Tarek Selim, cofounder at Coyosy, a startup producing repairable and upgradeable gadgets, says he filed his tax credit application in April and only got the money back at the beginning of August; a wait of more than three months. Before the change, founders reported getting the money within a few weeks of applying.
“It was really stressful; we were really close to actually having some financial issues,” he says. “Luckily, within the last two weeks of our runway, they managed to send it out to us. It was like a miracle.” Selim believes that if he hadn’t got the money, his company would have gone bankrupt.
For next year’s budget, he’s not going to bet on the tax credit money. “It's a great incentive from the government overall — I don't see many countries actually doing that — [but] they need to improve on the execution,” he says.
One founder waiting on an R&D claim, who wants to stay anonymous to avoid exacerbating his relationship with HMRC, says he's been waiting for the money for more than 100 days. The system shows that his application has been approved but he's not received any money — nor any information about when it will be paid out.
The claim is equivalent to three months’s run rate, the founder says. As a result of the delay, the company didn’t pay the two cofounders’ salaries last month and had to lay off its one employee.
“It's cashflow problems that cause the majority of companies to fail, not their profitability; companies not being paid when they've been told they're going to get paid,” the founder says. “For the government — which should be the most reliable of the payers — to be taking a long time to pay, missing its own deadlines, and then refusing to communicate to you so you can't plan — it makes it very hard for us as a business.”
“And as a consequence, we're basically firing people and we're having to subsidise it by not paying ourselves.”
Another founder, who also prefers to remain anonymous, says he waited for his claim to be paid out for over five months.
His company wasn’t left in a life-or-death situation because it had raised an investment round a couple of months earlier, “but if we didn't have that funding round closed, that extra money would have kept us going another few months, which might have allowed us to close the funding round if we needed to,” he says. “A startup can go bust in three months.”
Apart from the delays in payments, claimants have also been disheartened by the lack of clear communication from HMRC.
Selim from Coyosy says the company had been chasing the payment for months. “[HMRC] don't respond,” he says. “They even have their call centre flagging [this]: [they say] "don't call us for the R&D tax credits and follow-ups".”
Another founder has had a similar problem. HMRC asked him to write a letter of complaint instead — an answer to which can take up to eight weeks.
Claimer is a registered tax agent, and sits on HMRC’s R&D Communication Forum, but even in this position McCann says “it's very difficult to get very transparent answers from HMRC".
“We call them up daily on behalf of our customers, chasing up overdue claims, and trying to better understand the situation," he adds. "But there's very little consistency among what the individual agents on the other side of the phone are saying.”
HMRC’s spokesperson didn’t comment on the communication problems.