Aussie entrepreneur and investor Adir Shiffman has launched a petition calling on the government to peddle back proposed changes to the R&D tax incentive scheme, which could compound the damage being done by COVID-19.
Having founded six startups, including PricePal and Help Me Choose, Shiffman is now executive chairman of sportstech company Catapult Group, and is involved with several startups, including acting as chairman for mattress business Sleeping Duck.
In the petition, Shiffman says there is an “extreme and unprecedented new level of urgency” to put the brakes on any changes to the tax incentive.
The controversial proposed reforms would introduce a refund cap of $4 million, and create a tiered system, calculating an ‘incremental intensity’ measure based on R&D expenditure as a percentage of total business expenses.
Among other things, Shiffman demands a six-month suspension of the Senate committee enquiry into the reforms, leaving time for the economic effect of the coronavirus outbreak to be fully assessed before any decisions are made.
Already, “support is building rapidly”, Shiffman tells SmartCompany.
At the time of writing, 318 people have signed the petition, which has a target of 500 signatures.
“Businesses will fail”
Changes to the incentive scheme were already unpopular, and according to Shiffman, they could now pose a genuine existential threat to early-stage startups.
“Great technology companies all start as early-stage startups, and early-stage startups are extremely vulnerable businesses that largely can’t survive without external help.”
When he’s talking about early-stage startups, he means ventures that are generating revenue of less than $20 million. Those looking at $5 million or less are “especially vulnerable”, he says.
But for these companies, the R&D incentive has historically proven to be “one of the most important survival mechanisms”.
Shiffman admits the scheme may not be perfect, “but without doubt, every single startup in Australia that produces intellectual property has been reliant at some point for their survival on this R&D tax incentive”.
While Shiffman, like many others in the startup space, was already concerned about the effects the changes to the R&D tax incentive could have on startups, especially those in the earliest stages, losing that cash injection now “would definitely imperil the survivorship of a large number of these businesses”, he says.
Already, he’s seeing startups reporting significant drops in revenue. Many are at the stage where they’re burning through cash. Those that aren’t usually, now find themselves burning through their reserves as their sales dry up.
“The medium-term outcome is that many of these businesses will fail,” Shiffman states, frankly.
“The short-term outcome is that they’re firing workers. They’re firing them because they’re terrified of running out of cash.”
Startups are constantly told, and correctly, Shiffman says, that the number one rule is to not run out of cash.
“The biggest expense for these businesses is people,” he explains.
“If we don’t act quickly, there will be thousands, if not tens of thousands of job losses within months across this industry,” he adds.
“The industry won’t recover from that for a very long time.”
Making the changes Shiffman suggests could allow more people to stay in their jobs, and help keep promising companies from going under, he says.
Economically, that will be a good move for the country.
“This will have a dramatic … long-term impact on lots of companies, which will end up producing intellectual property-related export dollars for Australia, down the track.”
A stimulus for startups
Shiffman says the government’s coronavirus stimulus package — at least, what has been released so far — is “admirable”. But more will need to be done.
“They came out very quickly with a large package,” he says.
“The challenge is that events move so quickly, that a large package looks small within a week.”
Shiffman’s petition calls on the government to act in three specific ways.
1. Suspension of changes
First, he suggests a six-month suspension of the Senate Economics Legislation Committee Enquiry, which is currently reviewing changes to the R&D Tax Incentive legislation.
“They need to provide some time to see the wash-up of economic consequences of this crisis, before recommending any legislative changes to this,” Shiffman states.
At the same time, one public hearing has already been cancelled, and he expects it will be the first of many.
Suspending the enquiry for six months is “an easy and logical thing to do”, he says.
2. Pause on clawbacks
Secondly, Shiffman suggests putting a six-month pause on the ATO’s proceedings to re-claim tax incentive payments made in error in previous years.
Back in 2018, an apparent crackdown on the scheme saw startups including Airtasker ordered to repay millions in claims from 2014 and 2015, after the applications were audited and rejected.
Freezing proceedings to get that funding back would “maximise the survival likelihood of those entities while the economic impact of COVID-19 is at its most extreme”, the petition says.
3. Cash injection
Shiffman proposes supporting startups with a cash injection, by offering them access to next year’s R&D tax claim early.
“Take the payment they’re due to make next financial year … and make that payment at the end of April,” he suggests.
“The mechanism is there to do that.”
Of course, there will be a bit of guesstimation involved in the payouts, but any discrepancies can be ironed out when startups lodge their annual returns for the 2020-21 financial year, he says.
The mechanism to make that payment is already set up through the ATO, he notes.
“Bringing forward that payment will save thousands of jobs and maybe hundreds of companies.”
And another cash injection
In addition, Shiffman would like to see a bit of a bonus for startups with revenues of under $20 million. Again, that’s revenue data the government already has access to.
He proposes a one-off payment, received along with the above early payouts, doubling the first $200,000 of their claims.
“That’s effectively a survival payment, so that these companies don’t have to make workers redundant, and have some cash certainty,” he says.
And Shiffman has done the maths, he says.
“The cost of doing that would be less than the total cost of the airline payments they just committed to.”
A matter of survival
While built-in agility and ease of remote working could be positives for startups, they’re by no means immune from the economic disruption COVID-19 will bring.
Even those that sell to enterprise customers can expect interest to wane, if not disappear completely, says Shiffman.
“Some have already frozen discretionary budgets,” he says.
“The challenge with enterprise customers is that the person in your company who loves what you do as a startup and can’t live without it, all of a sudden will have their ability to spend money completely frozen.”
Startups at all stages should be taking this crisis seriously, he warns.
“We don’t know how this is going to play out. It’s unlikely to get better in the next few months,” he says.
“Startups should make absolutely sure that if their sales were to fall extremely materially, that they would have cash to survive for the next 12 months.”
Of course, that’s easier said than done.
Shiffman’s advice is for startups to go to their investors and talk to them about the situation as soon as possible.
“Try to get additional capital from them to build up your balance sheet, even if you have to do it at a valuation discount,” he says.
“If things get better, it will just have been a little bit of an annoyance. If things get worse, it will get progressively harder to raise money,” he adds.
“No startup should feel any sense of complacency today, irrespective of what they do. They should all be assessing their expense profile and modelling the impacts to their revenue.”
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