Can R&D tax credits help get your business through a recession?

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All of us are familiar with the business cycle, either theoretically or through lived experience. The business cycle describes the downward and upward movement of our economies. In other words: growth and decline, boom and bust.

In general, we understand the trend of growth and decline – but precisely when stagnation will come is usually guesswork. The Great Recession of 2008 marked the end of one business cycle and the subsequent recovery marked the start of a new one.

In 2008, very few people actually expected the downturn when it came along (a few of the people who did were famously depicted in the book and film ‘The Big Short’).

Fast forward to now, though, and we’re actually in a unique position. We know a recession is coming. The COVID–19 pandemic has forced the issue.

Here’s what to do now

Recessions are obviously bad news. But we’ve been here before and we pulled through. And, arguably, we entered previous recessions in a much worse position.

For this recession, we’ve got a run-up. There’s still time to make your business shock resistant. You can begin to plan your path to safety now.

The most important thing now is to keep investing in your future. That may feel counter-intuitive, but we know this is exactly what business leaders were doing in the depths of the Great Recession.

A 2009 global McKinsey survey, for example, found R&D remained a strategic priority for executives even in that most turbulent time. R&D is an economic stimulus. That’s why governments tend to double down on R&D tax incentives in times of economic downturn.

We also saw the government stepping to reward businesses that invested in innovation during the last recession. The eligibility criteria for SME R&D tax relief (headcount, turnover and balance asset thresholds) all doubled, bringing a huge number of new businesses into the more generous SME tax incentive, at the same time as an increase in the rates of relief.

R&D and the coming recession

When precisely the COVID–19 recession will end is guesswork, highly contingent on the public health efforts trying to contain the virus.

In the short term, we have seen more businesses prioritise their R&D claim submissions. These submissions won’t see values impacted, as claims are retrospective, so relate to periods before lockdown.

In the longer term, however, we’ll likely see some claim values diminish as staff are furloughed and a more conservative business atmosphere takes hold. But, and here’s the lesson from 2008, there will be those businesses that take this moment by the scruff of the neck.

Remote working has spurred many businesses to fast-track digital transformation projects and others are looking to the new consumer demands that such drastic changes to our behaviour might create.

Based on history, I expect these businesses to be better placed to weather the coming recession.

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