(Bloomberg) -- Some UK startups have been waiting upwards of six months to receive research and development tax credits from HM Revenue and Customs, forcing some to take out loans to plug the gap in funds.

Fintech trade body Innovate Finance said member firms are worried about lengthy delays that make it difficult to predict their cash flows.

“We are concerned that UK innovation may be impacted by this just at a time when investment in technologies such as AI may start ramping up globally,” said Janine Hirt, Innovate Finance’s chief executive officer.  

The tax credits are meant to encourage companies to make scientific and technological advances in the UK, by giving back a portion of their R&D spending. The program supported 89,300 mostly small firms in the year to April 2021, with a total of £6.6 billion ($8.1 billion) paid out. 

But most startup founders have experienced delays in HMRC processing and paying out tax credits, according to a January 2023 survey by the Coalition for a Digital Economy, a campaign group for the tech industry.

The number of claims has more than doubled since 2015 and the government has estimated that error and fraud make up 4.9% of the program’s cost. Last year, HMRC extended the standard turnaround time on a claim from 28 to 40 days while it stepped up investigations of possible criminal abuse of the system.

Government Clampdown 

The government is also reforming the credits to make them less generous for small firms that lose money, while clamping down on relief for projects carried out overseas. But even before these changes take effect, many companies are finding it increasingly difficult to claim their entitlements. 

One R&D-intensive company had to wait for more than six months to have its claim processed, according to documents seen by Bloomberg News. The company said it had previously made several claims, all of which were approved and paid within weeks.

The founder, who didn’t want to be named as the company is still awaiting its tax credit, said the UK is now a less attractive place to set up a research-intensive tech firm than when they founded the company. The person said the delays were hitting cash flows and costing jobs.

HMRC, which did not comment on individual cases, acknowledged that it had extended processing times. “Security checks on R&D claims were increased after suspected organized criminal attacks were identified. These extra checks to protect taxpayers money meant the target time for claims was extended,” a spokesperson said in a statement. 

Some startups are turning to advance loans to cover their spending until R&D tax credits come in. Dominick Peasley, CEO of SPRK Capital, said his firm’s lending rate “has typically been growing at over 100%” quarter on quarter. The company provides advances from £25,000 to £5 million — sums that are vital for firms that are yet to generate their own revenue, Peasley said. 

After Chancellor of the Exchequer Jeremy Hunt announced cuts to tax relief for small companies last year, more than 250 startup founders signed an open letter organized by Coadec warning the change would “significantly damage the UK’s startup ecosystem.” Three quarters of respondents said they may not be able to pay staff or meet other business costs as a result of the cuts.

Since then, the system has been tweaked again, allowing some loss-making companies to claim a 27% top-up, for example.

Investors are also concerned about the disproportionate impact the delays and changes have on startups compared with established corporations. Stephen Nundy, a partner at venture capital firm Lakestar, which has invested £300 million in UK-based technology startups, said a number of them had waited for significant claims.

“If other countries are supporting and rewarding risk taking, then the UK’s going to naturally put itself at a disadvantage at the very time this was one of the crown jewels,” Nundy said. “The side effect of some of this is to make people feel they don’t have confidence in the UK’s strategy and position.”

Startups can expect claims to get even harder, said Alastair Hall, UK manager for R&D tax relief and grant consultancy FI Group. More companies are having to prove their products are truly innovative, he said. 

Hall said other European countries have tightened applications for similar tax credits as the number of claims grew. In France, Hall said it was compulsory to submit timesheets with claims. In Spain, entrepreneurs need to submit reports per project to make claims. 

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