Ed Surman: [00:00:00] So what is the weirdest thing you’ve seen being added to an R&D tax claim?
Mike Newnham: [00:00:05] Well there’s a couple of things. There was one, I didn’t add it to the R&D tax claim in the end, but we did a claim for a company that’s that’s really doing some innovative work in plant based drinks. Part of that important quality of water was that you have to talk nicely to the water.
Ed Surman: [00:00:26] This week I talked to Mike Newnham from Quantum R&D about R&D tax claims, inflation and party leaders pitching for business in the general election campaign, featured in the news, and I’ll be providing you with some updates from Mushroom.
Ed Surman: [00:00:45] Today, I’m with Mike Newnham, Technical Director of Quantum R&D Tax Ltd., a boutique R&D tax practice based in Malvern, Worcestershire. A successful claim with Quantum R&D puts money in the pockets of their clients, helping them grow more and innovate more. Mike was the principal technologist at Rolls-Royce for nine years before taking on the role of Global Head of Materials at A.B.B. Power Generation. Five years later, as Director of Engineering for Bowman Power, he developed the UK’s first micro turbine based combined heat and power system, aimed at reducing emissions, lowering energy costs and improving the quality and availability of onsite power. Mike is a devout vegan and has a keen interest in sustainability and innovation. Welcome to the show, Mike.
Mike Newnham: [00:01:34] Thank you very much. It’s a pleasure to be here.
Ed Surman: [00:01:36] Yeah, I just thought I’d say before we go ahead. We met recently at the Gloucestershire Business Show and I think we got on really well when we first met because, you know, we share all of the same passions about innovation; and also small businesses getting the most out of using the very best in new technologies, and doing simple things like R&D tax claims, which I think are probably one of the simplest, easiest ways to get rewarded for your innovation activities that, you know, can make a really big difference to your bottom line.
Ed Surman: [00:02:12] So, yeah, that’s great. And obviously you’re based out of Malvern. It’s nice. It’s a really interesting area for business. I mean, they’ve got this accelerator, haven’t they? Well, let’s talk a bit more about that quickly.
Mike Newnham: [00:02:24] They do. So there’s the Malvern Hills Science Park, where a lot of small businesses there are incubating and growing. Malvern is a site for the 5G Testbed. So it’s one of the few sites in the UK where they’re rolling out 5G. And businesses are using the 5G in order to develop businesses and offerings, products and services and so on. So it’s a lot of activity around the 5G.
Ed Surman: [00:02:54] Yeah. I mean, and more generally as well, Cheltenham, it’s just down the road. There’s a huge cyber security facility there.
Mike Newnham: [00:03:04] It’s a cyber security hub for the UK. And in fact, one of our clients recently got an MBE for services to cybersecurity. And they are Malvern based as well.
Ed Surman: [00:03:13] I mean, the area is fascinating. We were talking earlier about how there’s a big push from local government as well to promote this area as a destination for young graduates or, you know, professionals that are looking to move out to sort of, you know, outside London. Because I see now London is sort of the vacuum that can suck all the talent. I mean, I live and work there too so I’m a hypocrite.
Mike Newnham: [00:03:40] Yeah. But there’s there’s loads on offer here. I mean, there’s loads to attract new businesses. You know, you’ve got the quality of life, but also you’ve got the talent here.
Mike Newnham: [00:03:49] So, you know, the Quinetic in Malvern used to be the radar headquarters for the the UK. You know, you’ve got a lot. There’s a lot of technology based businesses in the area.
Ed Surman: [00:04:06] Yeah. It’s a great area. I mean I’m from here originally so I remember years growing up here. Schools were good. So yeah, if you’re thinking about leaving the big city of London or Birmingham even, you should come out to Malvern or Cheltenham, I’m also surprised you tell me that there are some fintech companies in Malvern as well.
Mike Newnham: [00:04:24] There are some. So startups and a lot of them, you know, using blockchain as well. A lot of businesses are trying to explore how to use blockchain and developing new offerings and on with our services.
Ed Surman: [00:04:35] Let’s not tell the Shoreditch hipsters who think fintech begins and ends in Old Street. Fantastic. Okay. So let’s just go on to R&D. Before we go any further I would just like to say that while we are talking about tax, I wouldn’t want anyone listening to this show and thinking this is tax advice. Please, if you are thinking of going ahead with an R&D tax claim, you can contact Quantum. They are regulated by the ACCA, which is an accounting professional body, and they’ll be in our description on our podcast. And you can also find your local accountancy firm might have an R&D offering or there are plenty of R&D tax credit companies out there should you wish to engage. But Quantum are the best! So, an R&D tax claim, I think it’s one of the best schemes when you combine the ease, it’s a pretty straightforward process and the effects it can have on your bottom line at the end of the year with your corporation tax is brilliant and obviously as a tax and accounting service, but a key part of the R&D business is that it’s really about the innovation of what is R&D claimable. And you obviously not an accountant or a tax advisor by trade. You know, you were engineering director for many years. So. What I want to know first of all, is that you started there and now you’re at Quantum R&D. So just describe that journey for me.
Mike Newnham: [00:06:09] Okay. So I’ve been in R&D all my life, really. So as I said with Rolls Royce and A.B.B. I first came across the R&D tax credit scheme way back in early 2000s when the scheme was first launched and I was engineering director for a company that was trying to develop what they called decentralised energy. So onsite heat and power. So this would be a system where you produce all your own heat and electricity instead of relying on the grid. And the idea is it would be more efficient and more secure and so on. People like Hilton Hotels were interested, McDonalds were very interested in the whole thing and people that needed to be data secure were all very interested in that concept. So it was really the next big thing after the dot com boom, actually so decentralized power. So we were riding a bit of a wave and but we needed cash into the business. And the R&D tax credit scheme was a way of getting, you know, a significant amount of cash that would keep the business running.
Ed Surman: [00:07:19] And by cash, we’re stopping a cash outflow for corporation tax, after a time period after your year end, you’ve got to pay out to HMRC. And obviously, you know, with tax credits, you can get that reduced even to zero and have tax credits for the following year, correct?
Mike Newnham: [00:07:35] Yeah, yeah. It was a really important support for us, really. I mean, the run rate at some point was about £750,000 a month. We were burning cash. So the R&D tax credit scheme was really valuable. So basically it started there and then as I moved on over the years, I came across the scheme again through my brother’s engineering company and somebody that I knew was looking to meet manufacturing companies particularly and tell them about the scheme and so on. I introduced them to my brother who didn’t think he was doing any R&D. And this is typical of companies. They just don’t they’re not aware that they’re doing research and development. But, you know, he’s had £120,000 out of this scheme over the years, which has been an incredible support to his business, you know. So with his business, you know, one bad debt can wipe out the profits for an entire year. So just a single bad debt. So that kind of support has been a lifeline.
Ed Surman: [00:08:46] Fantastic. Yeah. So let’s just go into the detail of what an R&D tax gain is. So the technical detail. If we were to say in a sort of a sentence or more, I’ll give you some room. What is an R&D tax claim specifically?
Mike Newnham: [00:09:05] So an R&D tax claim is basically an amendment to your corporation tax return essentially, that says we’ve been doing some research and development. This is what we’ve been doing. And these are the costs. And therefore, you know, we’re entitled to money back into the scheme. So it’s a slightly convoluted way around getting money into companies because essentially, they enhance the costs that you’ve got. So by enhancing the costs that you have in the business, it reduces the profits that you have in the business. So essentially, if you’ve already made a tax, you filled in your corporation tax return, then what the R&D tax credit claim does is it says basically I should pay less tax than I’ve already declared. So that’s how you get money back into the scheme.
Ed Surman: [00:10:04] Fantastic? So if I were an entrepreneur or a business owner that is just trundling along, doing quite well. Trying to create you know, you’re saying, you know, people don’t realise that solving problems can equate to innovation. How would you encourage that person to sort of spot when they think they should be looking at R&D, how it works for them, what the process looks like and sort of what sort of things you can claim against?
Mike Newnham: [00:10:35] Right. So I think the one thing that people should take from this podcast is that they should seriously look at the R&D tax credit scheme, because it’s highly likely that they’re probably doing something which is eligible. So the scheme says that you need to be trying to make a technical advance and you need to be trying to do something which is not obvious, you know, in your industry. So so there’s no simple solution. And then you need to be going through some iterations to try and arrive at a solution in the end. And it’s as broad as that. So it can be any industry and it could be any activity as long as you’re trying to overcome some kind of technical problem.
Ed Surman: [00:11:20] So a cleaning company. Cleaning, you know, a sports stadium realises a particular bit is an inefficient way of cleaning under the stand seats, so they invent a product that or they find a way of modifying something that cost them some money. But that’s R&D.
Mike Newnham: [00:11:34] Or they could find a surface that they’re trying to clean, which is difficult to clean, or it could be in a difficult location. So they might have to do some work, to try and get access to that location. And, you know, you know, which takes some time in order to develop how to get to the surface. Or it could be trying to look at more Eco-Friendly cleaning materials. It could be a whole range of things or it could be an app that they’ve developed or something, like a piece of software, something that could be back-office stuff maybe not even related to the, you know, the main part of what they do. But anything where they’ve had to try and overcome some difficulty, some problem, it means they’re probably doing some R&D which would be eligible.
Ed Surman: [00:12:17] So there’s a form right? A form you fill in is the C-T?
Mike Newnham: [00:12:23] So your corporation tax is the C-T 600. And then the R&D tax claim is an amendment to that form. And it’s all filed online. So it’s filed with basically two other reports. One is a financial report which says, this is what it cost us to do the R&D; and a technical report which says this is what we actually did. So, the financial side of it is collecting essentially four types of costs. So your salaries, your subcontractors if you’ve used any on projects and any consumables or materials or anything, for any prototypes you might have made or even some software that might be dedicated to the R&D project and then your utilities that you’ve used eg. gas, water, electric. So you collect all those costs. The technical report says, these were the projects we worked on. These were the difficulties that we had to overcome. This is how we went about it. And you don’t have to have succeeded. So it could be a complete commercial flop but as long as you’ve attempted some R&D. So the whole scheme is to encourage UK companies to innovate, to reward them for having done some innovation and to encourage them to do more.
Ed Surman: [00:13:45] Fantastic. So just go through some of the numbers quickly. I mean, obviously you’re on the innovation side, but they inflate the costs at what sort of percentage?
Mike Newnham: [00:13:54] Yeah. So it’s 130% So that’s the enhancement that’s that’s applied.
Ed Surman: [00:13:59] So they they add the 30 percent on top or is 30 percent of the costs? So £1000 will be £1300?
Mike Newnham: [00:14:05] Yeah. So let’s say you’ve done £100,000 worth of R&D expenditure and that’s probably, not that difficult to accumulate, particularly with salaries. It soon adds up. And then a couple of subcontractors, you know, three people working on a project for a year or whatever it might be. So it’s not difficult to accumulate £100,000. That’s then enhanced by 130%. So an additional £130,000. So now your total R&D costs are then £230,000 and not £130,000 that you thought they were.
Ed Surman: [00:14:40] Now the next thing on the back of that, obviously that could take you into loss making territory if you inflate those costs correct?
Mike Newnham: [00:14:47] Yeah. So you don’t have to have made a profit in order to claim R&D tax credits. So that’s an important point to make. So you’re either going to be loss making at the start or those enhanced costs take you into loss making territory.
Ed Surman: [00:15:04] So what happens then? Because no corporation tax is due so you can’t offset the claim against your corporation tax.
Mike Newnham: [00:15:12] You then surrender, essentially the claim for 14.5%. So that £230,000, if that’s £230,000 loss, you surrender that at 14.5% and you get that back as cash into the business. And there are no strings attached to the cash. So you can do anything that you want with that cash. I mean in our experiences people use it to hire new employees or buy equipment that they couldn’t otherwise afford or do an R&D project that was within their mind but they’ve never really got around to do it or they’ve not been able to do it. But there’s no strings attached.
Ed Surman: [00:15:50] So the reason we chose that feature right now. It’s pretty timely. So obviously, we’ve got a really big push of innovation anyway. You’ve seen lots of disruptive startups at the moment, but also it’s quite timely with the general election. I believe the Conservative Party have made a pitch to increase R&D spending, but a lot of companies are making use of the R&D scheme already quite, quite substantially.
Louis Duncan: [00:16:11] Definitely. I think it was a 22% increase from 2016 to 2017.
Ed Surman: [00:16:17] How many of those are startups?
Louis Duncan: [00:16:19] I think it’s about 77% of those. However, it has been said that we’re far behind our competitors. And according to some stats I was looking at earlier, countries like Germany and Austria actually have about 3% of their GDP is R&D tax claims as opposed to ours was about 1.7%, which is quite poor.
Ed Surman: [00:16:44] Yeah, that’s actually a big difference.
Louis Duncan: [00:16:47] However, there has been reported delays in HMRC, that’s because obviously as more people get to know about these tax returns, they’re going to go and check everything. So I think the processing has actually taken a lot longer than the UK had expected which is a bit unfortunate.
Louis Duncan: [00:17:08] So actually my research shows that in the south of England, those are the most likely places for companies to be claiming their R&D tax claims.
Ed Surman: [00:17:18] So when we talk about regional distribution there’s a big imbalance between south and north in the UK. Obviously northern companies may think that, actually we’ve got quite a lot of innovation we need to be claiming. And as the feature shows again, like with sort of HMRC checking these claims a bit more, there’s actually a lot of innovation that you probably have been doing that you’re not aware you can claim for.
Louis Duncan: [00:17:43] You could definitely claim back on that and I think it’s a good thing because, as we were talking about last week with the scale ups, I think that’s going to be a key point for some of the SME’s.
Ed Surman: [00:17:52] Yeah. I mean, and you’re also going to get cash or tax benefit from that so it’s just such a good little leg up in the growth cycle.
Louis Duncan: [00:18:00] Yeah. In other news, actually, we’ve seen that the UK inflation rate has been at its lowest pace for at least three years with this being as a result of electric and gas prices going down.
Ed Surman: [00:18:12] Yeah. So I’d say it might go up again with an exchange rate uncertainty by Brexit stuff. But actually, that’s pretty awesome. So there’s been quite high wage growth. So disposable income should be getting a little bit bigger. I think wage growth rate is 3.6% or something.
Louis Duncan: [00:18:27] How did you know that?
Ed Surman: [00:18:29] Mate, I’m a nerd.
Louis Duncan: [00:18:29] Read the news guys, read the news.
Ed Surman: [00:18:33] And then obviously the final thing in the news is obviously the general action business pitch happened, I think yesterday or day before. They were at the CBI say. I mean, there wasn’t actually that much. I mean, Jeremy Corbyn had a bit of heckling. Jo Swinson pledged to stop Brexit, which will please lots of businesses. But actually the interesting one actually was Boris Johnson saying that they’re going to cap corporation tax cuts. So obviously the previous conservative administrations are going to keep taking the corporation tax rate down and maybe to 17.5%, maybe lower, but they’ve now capped it at 19% because everyone’s making spending commitments on things like NHS, education and, as a sort of a co-owner of a business, I’m okay with that actually. I think at the moment if we need to spend more money on public services, actually keeping a bit of corporation tax for the Treasury is okay, as long as the big companies start paying. Which is a big problem and they need to start paying what they owe.
Louis Duncan: [00:19:31] So what else do we have in terms of Mushroom updates?
Ed Surman: [00:19:34] So the free tast promotion is finishing in November. So, I mean, I’ve mentioned this every week, but we’ve had some really cool stuff. Black Friday is obviously coming up, next Friday. We’ve been asked to do a few Shopify products where we’re whacking on massive discounts and looking at, some of them do drop shipping. So we’ve been trawling, you know, to find gadgets and gizmos that may be good for Christmas. So, yeah, we’ve had a few hosts.
Louis Duncan: [00:20:02] It’s definitely not too soon to be shopping for Christmas. I don’t think, you know.
Ed Surman: [00:20:06] Well, our family, we have a lot of birthdays in November, so Christmas is on hold until the 1st of December. Unfortunately for us. You know, consumer Christmas starts early. All the Christmas cards already out. And I’ve heard a few sort of Christmas playlists in cafe’s already so Mariah Carey has come on in my ears at least about 35 times. So I think we’re well into the swing of things.
Louis Duncan: [00:20:29] Definitely. Alright so I guess we should just get onto the second part of the feature.
Ed Surman: [00:20:35] So we’ve just gone through quite a lot of detail there. Lets just quickly for our listeners go over some of the technical terms So we can just do you know, do the jargon buster. C-T 600?
Mike Newnham: [00:20:47] That’s your corporation tax return.
Ed Surman: [00:20:49] Yeah. And the R&D claim?
Mike Newnham: [00:20:51] So the claim is the amendment to the CT 600.
Ed Surman: [00:20:53] which gives you your tax credit, which is?
Mike Newnham: [00:20:56] The deduction on your tax liability.
Ed Surman: [00:21:00] Cool. Then just on the technical side, obviously eligible R&D tax claims means you have to make a technical advance. Explain that.
Mike Newnham: [00:21:08] So your technical advance is some advance in science or technology, which is not already out there.
Ed Surman: [00:21:14] Cool. Financial report?
Mike Newnham: [00:21:17] The financial report is essentially collecting all of the costs that you’ve incurred as doing your research and development.
Ed Surman: [00:21:24] And then the technical report?
Mike Newnham: [00:21:26] And the technical report details those technical advances that you’ve tried to make and explains the difficulties that you encountered and you tried to overcome them.
Ed Surman: [00:21:36] That’s great. Just quickly, before we go onto the next couple of questions, a really important thing just to get across, you’re saying that it’s an advance in something in science and technology that hasn’t been done before. But obviously that might put some people off, right?
Mike Newnham: [00:21:52] Yeah, it’s a technical advance in science or technology that you’re not aware of. So you have to do some research and development. It does put people off because when they go to the government website and see that or they get told that, they think, well, you know, that’s the sort of work that NASA would do, you know. So they don’t feel that it’s something that their business would be involved in. And that’s simply not the case. You know, we’ve done a lot of claims for people in, you know, very straightforward, manufacturing businesses, engineering businesses or any kind of business, really.
Ed Surman: [00:22:28] And I mean, this leads to the question of innovation is, how much? I mean, you said there used to be a limit, right?
Mike Newnham: [00:22:35] Yeah. So there used to be £10,000 limit. So you couldn’t make a claim unless you incurred costs, which meant that the claim was about £10,000. So your costs that you would have incurred would have to have been I don’t know, let’s say £50,000. And for small businesses that’s a lot of money. But the government has removed that. So now very small businesses can claim. So you could make a claim for £1,000 or a £2,000. And for very small businesses that can make a big difference.
Ed Surman: [00:23:11] So moving on to how much innovation, what innovation. I think that the fun question is, what’s the weirdest thing you’ve seen be added to an R&D tax claim?
Mike Newnham: [00:23:21] Well, there’s a couple of things. There was one, I have to say, I didn’t add it to the R&D tax claim in the end, but we did a claim for a company that that’s really doing some innovative work in plant based drinks. But his firm belief was that the quality of the water was important to the drink. I can understand why but part of that important quality of the water was that you had to talk nicely to the water. So he pointed to some research that’s been done in Japan that backed him up. Yeah, we didn’t put that in. But he did spend a lot of time actually swearing at the water and then tasting the drinks after he’d sworn at the water. And then after he’d sort of made kind of nice cooing noises. So he put a lot of experiments in there. But I would say, I think it’s a little bit out there. A lot of the other stuff he was doing was really rock solid stuff. That was excellent. And then we did another one. Again, it just shows you how you never know what R&D is. It was for a company that makes jumpers, you know, so they knit these jumpers. And this particular jumper was a joke Christmas jumper. And they wanted to put a pocket in the middle of the jumper so you could put your mobile phone in.
Ed Surman: [00:25:05] Well, Mike, it’s been a pleasure having you on. Just before we close off. What I would say is, with Quantum R&D, we have got the description of your company and in our podcast description, so if you’re out there and you need to need a dedicated R&D tax credit and claim done by a very knowledgeable man.
Mike Newnham: [00:25:32] Yeah just get in touch. We’ll have a chat about your business and we’ll just tell you whether or not we think you’ve got a claim or not. And if you’ve got a claim, well, other companies are available, but we’d be very happy to work with you. Great. And thanks very much Ed, I’ve really enjoyed this.
Ed Surman: [00:25:48] Ah cheers, you’re welcome.
Louis Duncan: [00:25:50] Well, that was really informative, wasn’t it?
Ed Surman: [00:25:52] Yeah. I mean, the stories are pretty funny as well. I think that water singing still makes me laugh today. I mean, the fact that someone was actually, you know, standing by a glass of water or a tank of water and singing at it. What that must look like from the outside! Say you were in a co-working space and you just walked down the corridor and you saw this this chap or this lady singing to some water, with your neck cocked to one side, taking a second look, being like, oh??
Louis Duncan: [00:26:17] I think the things that we do in business to try and get results is very crazy.
Ed Surman: [00:26:21] Yeah, mad. But on a serious note, we mentioned it in the interval. But actually it’s a really underutilised area. I know HMRC are sort of looking at it a little bit more. But you know, innovation isn’t just developing like a cool AI product or a blockchain product or a product that’s going to disrupt like every industry. Improving business processes internally or or doing something to a chemical to make your life easier, when you’re doing something like cleaning, that counts as innovation and it’s stuff you should capitalise on. I think anyone in any business should really just look at, Am I doing something different to my competitors or am I doing something that’s really gonna make a difference to the productive output of this company? That is probably innovation. And I think you need to talk to a R&D tax company like Quantum and say, does this count? And they’d be like yeah, sure. And you’ve saved yourself some corporation tax money. You may even get a cash benefit and it is really, really useful.
Louis Duncan: [00:27:18] Well, what are we going to be looking at next week?
Ed Surman: [00:27:20] So we’re going to be looking at debt and when companies are not in a good shape. So when they’re about to go south. We can always do talks on on all sorts of things and be positive and this will still be quite funny because Ron’s an awesome character but we also need to make sure that we cover things that aren’t necessarily the best situations that companies can find themselves in. Ron works for a company called Business Rescue UK Ltd. They specialise in pre-insolvency debt management solutions. He’s actually he’s a really, really experienced business owner director. He’s in sales. He’s managed manufacturing processes and the insight he has on the warning signs when a company isn’t going well, it is really, really, really valuable. And I think anyone who, you know, going into the winter, some dark months, you know, if you are feeling like, you know, things aren’t going as well as they could be, it’s a really great interview to listen to. Particularly the key message from that and we’ll hear more next week. But when you think the end is nigh, the end is maybe a lot further than you think because, you know, things don’t move as quickly as you may fear they do. And he really does end up giving you sort of giving you a fair amount of hope, and not just hope, but actually a realistic chance of working out where you can actually take what you’ve got and improve the situation. And a lot companies end up soaring on ahead. You know, you make a mistake once and it’s done.
Louis Duncan: [00:28:45] Exactly. And you never make that same mistake again. Okay. Hopefully. Well, we’ll see you guys next week.