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From innovation to infinity: The Space industry's path to R&D tax relief

By Dr Brian Williamson

I remember the words from the great Buzz Lightyear… “to infinity and beyond”... is that possible? I thought infinity was, well, infinite, but it is only a cartoon. Even Captain Kirk’s mission was to "boldy go where no man has gone before". Bold men with giant aspirations began going there in the ‘60s. The world watched in amazement on TV and there was not a split infinitive to be heard from the mesmerised commentator, James Burke.

Our observable universe is 90 billion light years across and Earth is but a tiny spec of dust in an ocean of cosmic dust. Beyond our planet are 100 billion to 200 billion planets in our galaxy alone. Then of course there are estimated to be 200 billion to 2 trillion galaxies. I think that is far enough to call infinity!

The challenges in the space industry are just a whole new ball game for us earth-based business folks to imagine, yet the space industry can benefit from earth born business incentives like R&D tax relief.

It is easy to see innovation aplenty in such an enormous expanse. The emerging industries are going to bring forward some mind blowingly creative solutions. Take in-orbit servicing and active space debris removal to allow safer space operation, habitation and travel. Then there’s living in space, which will spawn space-based energy innovations leading to the need for in-space manufacturing. We can’t but be astounded at what may emerge in the future but let’s bring the argument closer to earth.

Innovation funding will tend to be focussed on some key areas in the next five years such as earth observation applications, services and satellite broadband to name a few. These will lead to navigation applications and space domain awareness, or as I would call it ‘space traffic control’.

Clearly, the majority of these applications and the challenges they bring will be eligible for R&D tax relief. Once you break the atmosphere and gain orbit, our knowledge outside of this world is infinitely less than our worldly knowledge. For R&D Tax relief, all I can see is eligibility in abundance; absolutely everything will be innovative. In the meantime, all the stuff required for ‘up there’ will need to continue to be made ‘down here’. Today, the space industry covers a wide range of companies from the launch industry at one end to the supply chain of engineers dealing with parts and software. In such an advanced, technically difficult environment the challenges appear endless.

The Challenges

Overcoming challenges is at the heart of the evidence required for successfully receiving R&D tax relief. So what might be the typical challenges?

The first one, and perhaps the most obvious one to mention is the harsh environment. You need to design for extreme temperatures, vacuum conditions, radiation, and the microgravity of space. Components must be designed to withstand these conditions without degradation or failure. Traditional electronics are sensitive to radiation, so you require radiation-hardened electronics and you have to have the ability to test them. Thermal control systems too have to work to maintain temperature stability by efficiently dissipating heat. Even simple seals and gaskets are not so easy to make and unlike a mechanical device on earth, which can leak without catastrophic consequences, in space there must be pressure integrity. Fluid systems also work differently in microgravity and all the traditional learnings on fluid dynamics is just foundational knowledge to be built upon with thesis formation and experimentation.

Then there’s reliability. This has to be taken to a new level as durability is not just a desirable feature but an essential! Weight and size become a crucial element of design in order to make some projects commercially viable to be launched never mind technically feasible. The list of challenges for a space business that interact and impact each other is endless.

Let’s imagine you run a factory in Falkirk or a design house in Dundee and you’re widget is sought after by the space industry. Suddenly, your day-to-day earthly challenges just got elevated to a new level as you became part of the space industry supply chain. The battle starts with design. Are you able to design a widget that will work perfectly in space? Now you have to battle with manufacturing the widget and let’s be honest, sometimes design and manufacture are not as aligned as they could be.

Let’s say you overcome these two major challenges and your widget works here on earth. Now you have to establish a test routine that will simulate the conditions in space to test it will work in that environment. This might include multi testing for heat and radiation. So far so good. However, how do you test the vibration levels of your design in space? How do you figure out all the variables that will impact the level and frequency of vibration and how, together with all the other conditions in space, will that impact the performance of the system?

Multiple failures will emerge along the testing pathway and that may be seen as hugely expensive but as far as eligibility for something like R&D tax relief, failure is a desirable feature.

It confirms the uncertainty and R&D tax relief has you covered. The caveat to that is that sometimes clever people don’t think they do clever things - it is easy for them. Their thesis may work first time and they don’t realise what they have achieved has been preceded by a ton of eligible R&D activity.

What is R&D tax relief?

The government want to reward companies for trying to solve technical challenges when they spend money developing new products, processes or services; or enhancing existing ones. They do this through the tax system by making an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction.

I would go into the eligibility criteria and that is almost an article in itself. It is always best to get advice from a professional advisor in this area. We do that at YRDAB for companies free of charge.

Effectively HMRC allows you to enhance the value of costs in your P&L which suppresses your tax liability. If you are loss making you have the option to surrender these calculated losses for a cash repayment. The benefit varies according to your status, SME or large, loss making or profitable and R&D intensive or not. Sufficient to say you can get a benefit of up to 27% of your eligible costs back in tax relief.

That means if you have £100k of eligible spend you could get back up to £27k through the tax system.

Compiling an Application or Claim

Whether you do your own claim or you employ an R&D specialist, the process demands very similar skills. What you require is a combination of your depth of knowledge of the legislation, the eligibility of the technical challenge and an understanding of similar technologies already in the market. Having that combination is a skill in itself and that is why specialists are a key component of submitting a claim.

As governments all over the world pump R&D tax relief into encouraging economic stimulation there could be an appearance of limitless financial support for companies through the scheme. If you are undertaking eligible activities R&D tax relief is a given and you do get your money. So far, no one gets rejected because HMRC has reached its allocated budget. Until now.

HMRC is scrutinising applicants and providers rigorously in an effort to uncover both errors and fraud. The impact this has on the market is to dissuade companies from claiming and disrupt the provider market. It is even harder now to decide on what you should do and who to ask for advice.

The Current Landscape

R&D tax relief is going through its own turmoil. Over the last year HMRC have waged a war, (and I don’t use that term lightly) resulting in carnage for many providers and companies. It has long since known there were bad guys (companies and providers) out there ready and willing to exploit the system and some of the horror stories of lies and even fraud are breath-taking. HMRC has set about seeking out and destroying these companies and providers but as with any war, inevitably there is collateral damage.

HMRC’s push back has reached the level that some good providers cannot withstand the cost and time of multiple enquiries. Most providers have offered a defence of an HMRC challenge within their standard terms but that was at a time when one in a thousand claims were challenged. Now that it is one in ten claims being challenged the market dynamics are quite different. Most providers I talk to tell me the sunk cost of an enquiry is £10,000 win or lose.

In this environment eligible companies are also under fire. Few DIY clients have the bandwidth to defend a claim robustly without impacting their company’s core activities It’s not an exaggeration to say the whole market has suppressed the willingness for companies to claim either on their own or with a provider.

Innovation funding is enormously important for the development of the economy, for UK business and for the spirit of entrepreneurship. Right now, there’s an imbalance. No doubt HMRC has to take steps to protect the effective use of all our taxes and rogue players in companies and providers cannot be allowed to gain easy access to our tax money. Right now everyone is trying to withstand the storm but there will be casualties. Let’s hope that when the current storm passes, the good companies are still standing.

Why use a provider?

I think the dynamics of the current landscape is a strong enough argument to use a provider however there are a few other reasons on why I think you should choose a provider to help you.

A few years ago, an R&D provider company called Jumpstart was asked by a large Scottish search engine company to look at their claim. Their CTO invested a lot of his time writing up projects for his large accountancy practice to review. So once a year he had to lock himself away in a room and write. What he wrote was good, not quite to HMRC standards but potentially good enough. Their accountant collected the relevant costs as far as they knew, and the claim was submitted. Jumpstart’s review revealed a good degree of eligible costs were missing. More importantly, several projects they had initially dismissed were in fact, very eligible.

The result was the expert team at Jumpstart managed to secure the company a significant six figure increase in claim size.

I acknowledge I’m bias when it comes to employing a top-rated provider versus going it alone with a DIY claim, so allow me to set out my case.

You could of course become an R&D tax relief expert. You have the cerebral capability to read the tax relief legislation and you have gone through an educational process that has taught you to understand the construction of an outstanding report or the completion of a grant application. With this, you could be ideally placed to train yourself and become an expert.

Many of the people we employed at Jumpstart when I was there as CEO had three degrees and were some of the smartest people I know. The difference between them and you, however, is they did this day in day out. You only use your (rusty) expertise to do your R&D claim once a year. Is it any better for grants? You could argue grant writing may be more frequent but it can never reach the threshold of unconscious competency or that magic 10,000 hours of practice (reference Malcolm Gladwell). Additionally, as the CTO/COO/CEO/Founder, is the development of your business not THE most important thing and everything else is secondary to that? I believe it is, so for me the big question must be, is writing your own reports really such a good use of your time and expertise?

It makes more sense to me for you to employ someone who has an abundance of these skills and has done this and little else for years. What’s more, you can provide the relevant company information in the form of an interview. You just talk, and they listen and question. Afterwards, you go back to building your great vision and delivering on that. The experts go back to their base and figure out the robust argument compliant with ever changing rules and legislation. Of course this service is ultimately a cost benefit judgement. Will you have a better chance of getting R&D tax relief through your own efforts or is your expert provider going to do it quicker, smarter and more comprehensively? In my experience the financial outcome answers it for you.

Those who go it alone will counter my argument but let me say this: your business is not to specialise in innovation funding. Your time is ideally spent on pushing forward and implementing the vision. Sure, money is the fuel that keeps the business running so I understand the drive to focus on raising money either through equity funding, debt, grants and reliefs. However, would you invest or lend a company money that presented themselves as their own experts in getting grants or tax relief, or would you prefer a company that was living and breathing their vision? I’d be more impressed and excited by the latter.

How to choose the right provider

In 2008, my education about R&D tax relief started as we built and grew Jumpstart.

Over the next decade I discovered not only the complexities of the ever-changing interpretation of the legislation but also how dysfunctional the market was becoming.

I was exposed to the good the bad and the very ugly. The trouble with the market is providers can all look very similar and often the only differentiator noticeable is price.

This area is an unregulated market and there are good guys and not so good guys out there. All I’d say is imagine a world where surgeons could operate on anyone with no training, and you picked them according to the marketing they employed. Would you pick the cheapest or the one that was reassuringly expensive? Or even the surgeon that was highest on the Google rankings. Picking an expert provider is a specialist subject in itself.

That’s one reason why I started the Research & Development Advisory Board (YRDAB). To give companies independent advice on which provider would be best suitable for supporting them with their claim. I have audited 42 providers, and that number rises every month. My aim is simple. I want to give companies an informed view on the choices they have when it comes to providers. The advice is for all. Even if you have claimed, never claimed, used a provider, an accountant or done the claim yourself, I am here to be that independent source of advice and guidance.

At YRDAB we advise not only companies but help accountants with their R&D tax relief strategy, help providers sell to other providers and support providers with their Buy & Build strategies. If you are in the world of R&D tax relief or planning to take your innovation to infinity and beyond…we should talk.

Written by:

Dr. Brian Williamson


Your Research and Development Advisory Board

*Main image is AI generated.


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