A number of UK start-ups have said they were forced to raise emergency funds in 2019 after sudden and unexpected delays to their tax credits.
The long delays caused serious concerns in the start-up community, which is already upset at plans by the government, which has promised to be “pro-enterprise”, to curb entrepreneurs’ tax relief in the upcoming Budget.
The delayed tax credits were part of a scheme to encourage more research and allowed small and medium-sized businesses to deduct 130 per cent of their research and development costs from their annual profit. In previous years, these credits were paid within six to eight weeks but in 2019 some delays stretched to months.
The founder of one fintech company, who asked to remain anonymous, said that it spent “six to seven months chasing HM Revenue & Customs”.
To plug a hole in its balance sheet, the company resorted to raising expensive convertible debt, it said. The situation left scars; in a recent funding round, the company had to indemnify an investor against the prospect of future delays by HMRC.
Similarly, a chief executive of a software-as-a-service business for wearable technology said directors were asked to loan money to the company to tide it over. Another fintech entrepreneur said that they had to raise bridge financing from an existing investor, before a funding round closed, to cope with a 12-week HMRC delay.
Lee Maughan, of Green & Purple, a financial outsourcing agency that looks after the accounts of 15 to 20 start-ups, said that the situation became so critical at one point that when he called HMRC, his call was forwarded to an automated message that stated that if claims were submitted after a certain date, “We’re not going to deal with it right now”.
A HMRC spokesperson said it was “sorry that some businesses have not received payments as quickly as we would like, and staff have been recruited to help with processing”. It also added that it “reviews tens of thousands of claims for R&D tax relief each year”, which are carefully scrutinised to provide proper value for the taxpayer.
For many capital-hungry start-ups that model their cash flows on a weekly basis, any delays in funding means cutting back on hiring, projects or other growth initiatives.
Fears are growing that the issue could return again in March as many small businesses submit their claims following the common end of the accounting year in December.
Mr Maughan said the situation in 2019 was the worst he had encountered in his time as an accountant and, in anticipation of a repeat this year, he has submitted the claims as fast as possible for his clients in 2020. “We will definitely see the pressure on HMRC again”, he said. “Whether it will be as significant this year is another question”.
