r&d tax credits

R&D tax credits: Key changes from March 2015 Budget Statement

Here is a short summary of the key changes related to the UK R&D tax credit incentive as announced in the March 2015 Budget statement.

Changes include:

  • An increase in tbe SME rate of super-deduction from 225% to 230% from 1 April 2015
  • An increase in the Large company scheme “above the line” credit from 10% to 11% from 1 April 2015
  • Introduction of an advance assurance process from Autumn 2015 for those smaller companies making their first R&D tax claim and seeking some certainty as to eligibility
  • Speedier processing, increased publicity and more…

 

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Share Equity: Once it’s gone, it’s gone

Equity Sometimes there is little alternative but to issue shares to investors, employees and other stakeholders. If the company’s an early stage company then it has little else to ‘sweat’ to release some cash.

You might be able to benefit from the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS) but – although technically related to your company – it is the investor that pockets the tax relief (not you). You might be able to squeeze some more cash out of the investors by virtue of the tax relief they will receive but (as the rules currently stand) you have to issue shares to them in return for their investment.

Whilst money for salaries is tight, employees may benefit from an approved share option scheme like the Enterprise Management Incentive Scheme (EMI). Although they only hold a piece of paper entitling them to the shares at some point in the future (say on an exit), you must still take into account the post dilution shareholdings once their shares are issued.

So you started with 100% of the company and very quickly you might find that your shareholding is down to not much over 50%. And then there’s that big VC round you’re contemplating in a year or so – further dilution to come…..

There is only ever 100% to divide up. For each 1% that goes it has gone (probably) for ever. Often it is a price worth paying as the old saying goes,

“its better to have 40% of a successful large pie than 100% of a failing tiddler”

But at every stage you should try to ensure that you have explored incentives that do not require you to part with your equity in your company. 

So you could look at R&D tax credits and grants. Also, further down the line the Patent Box could shave some much needed cash off your corporation tax bill.  These Government tax incentives and grants do not require you to give up any of your shares in return for the cash and so could allow you to get further down the line to achieving your milestones with no further decrease in your shareholding.

Often in practice, companies have little alternative but to push through with investment for shares in the company but its always useful to remember that there are other (non-equity) funding avenues available.

Image: Creative Commons License Richard Potts via Compfight

R&D Tax Credits: How the new HMRC 14.5% cash credit works

I’ve been getting some questions about the new 14.5% R&D tax credit rate announced in the March 2014 Budget Statement and how it works in practise.

So here’s a short video outlining how the effective rate of cash receivable from HMRC increases from 24.75% to 33% on qualifying spend – that’s one third of your R&D expenditure effectively being funded by the Government! 

Plus how it could result in approx £8,000 of additional cash in your bank account for each £100,000 of qualifying spend if your SME is loss-making during its R&D phase.

Please leave your comments or feedback below or get in touch.

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March Budget 2014 – Key points for Digital, tech & creative companies

Highlights include:

  • Increase in payable R&D tax credit for loss-making SMEs from 11% to 14.5% for expenditure incurred on or after 1 April 2014. This means that approximately 33% of qualifying spend is eligible for a tax credit rather than the current 24.75%
  • Seed EIS (SEIS) turned into a permanent tax relief given its success along with the 50% CGT exemption for gains reinvested
  • Doubling of the Annual Investment Allowance from £250,000 to £500,000 for expenditure incurred on or after 1 April 2014 for companies until 31 December 2015. This will allow 99% of companies to get 100% write off of their investment into capital expenditure in the year of expenditure (excludes buildings and most cars).
  • Personal allowance increase to £10,500 from April 2015 (£10,000 from 6 April 2014) and an increase in the basic rate tax band to allow higher rate tax payers to receive some of the benefit.
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Taxation of Innovation – How UK tax incentives support the innovation lifecycle

Here are the slides that I used to present to the Chartered Institute of Patent Attorneys (CIPA) at a seminar in Liverpool last week. The key relevant theme was the Patent Box (given the audience) but my objective was to emphasise how and where the Patent Box fits into the wider series of Government tax incentives aimed at innovative IP-rich UK companies.

From start-up we have the Seed EIS followed by EIS for tax efficient funding. Both schemes are designed to support companies undertaking R&D work and creating their own IP.

R&D tax credits then step into support companies during the development phase. The R&D tax credit relief continues to be a fantastic source of support for UK companies but up until 1 April 2013 there was a cliff-edge at the exploitation stage as there were no tax incentives there to support IP rich companies.

This where the Patent Box steps in to support companies with qualifying patents to complete the innovation business lifecycle.

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Two common R&D tax credit stumbling blocks for start-ups

Solar cell technology based on organic materials

Picture the scenario: a new technology startup. The founders invested £250,000 into the development of some new technology. The company is burning through the cash at a rate of knots and so they’re looking forward to recouping a chunk of it by claiming R&D tax credits under the ‘R&D tax credit scheme’ – something they’d heard about somewhere not long ago… In their minds, the tax credit had already been ear-marked for the next phase of work.

But two HUGE (yet surprisingly common) issues were about to put a hole through the R&D tax claim:

  1. Most of the costs were subcontracted to third party developers. This is fine in principle but under the R&D tax incentive rules such costs are restricted to 65% of the costs incurred (where the subcontractor is unconnected). The logic here is to eliminate the ‘profit’ element made by the subcontractor on the R&D work to get closer to an employee scenario. So here, in one swoop, almost half of the qualifying R&D costs and therefore claim had gone…!
  2. The company’s accounting period ended on 31 March 2012 and, for periods ending before or on this date, any R&D tax credit is capped by the PAYE / NIC suffered by the company in the period. This company had no employees (they’d subcontracted out all of the work) and had paid themselves no salary so there was £nil PAYE liability and therefore £nil repayable R&D tax credit. If the accounting period had ended just one day later, the company would have fallen within revised rules whereby the PAYE / NIC cap falls away. Ouch.

Of course, we should not lose sight of the fundamental issue of whether the company’s activities qualify for R&D tax purposes in the first place? If so, the company could still get a good result overall (a significant enhanced loss carried forward in the 31 March 2012 period end to offset against future trading profits and a potential repayable tax credit on qualifying activities and costs incurred in its next period ended 31 March 2013 and onwards) – just not perhaps as good as the founders had understood from the outset.

Fortunately, given the relaxation in the rules for accounting periods ending after 31 March 2012, the PAYE cap is no longer a problem – although it can still bite for retrospective claims (which can be made until 31 March 2014).

This is often a problem with tax incentives – there are almost always traps for the unwary…

Image: BASF – The Chemical Company via Compfight

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R&D tax: 5 common misconceptions

I could probably give you 25 misconceptions that I hear on a daily basis but, for now, here are 5 common misconceptions regarding the UK R&D tax relief:

  1. “You need to have paid corporation tax to receive an R&D tax credit cash payment from HMRC” – wrong! HMRC will help you supplement your development costs by paying you a tax credit equivalent to roughly 25% of your qualifying R&D spend (if loss-making).
  2. “You need to have paid sufficient PAYE / NIC to receive an R&D tax credit cash payment from HMRC” – wrong! This requirement was dropped for accounting periods ending on or after 1 April 2012.
  3. “I must have missed the boat as this is the first I’ve heard of R&D tax relief being relevant to a company like mine and we incurred our development expenditure in last year’s accounts” – wrong! We can apply claims retrospectively over the accounting periods that ended in the past two years.
  4. “My company is too large to be eligible to make claim under the preferable SME R&D tax regime” – probably wrong! The SME definition for R&D tax covers probably 90%+ of the UK companies i.e Less than 500 employees plus either turnover of less than €100m or balance sheet total of less than €86m.
  5. We don’t have an R&D unit with specialists in white coats – probably one of THE most common misconceptions – fear not, the R&D tax relief applies across all sectors and industries as technological advances can happen anywhere…

Please get in touch if you’d like to learn more  – plus no doubt allow us to dispel the other 20 misconceptions…!

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£1m benefit of being a tax aware entrepreneur

EuphoriaMark knew that his new business would be at the cutting-edge of technology and potentially even a world-player – exactly the sort of business that the UK Government is keen to promote and support in the form of tax incentives.

Fully aware of the opportunities that the UK tax code provided for releasing cash into his new venture, Mark kicked off by raising an initial £150,000 under the Seed Enterprise Investment Scheme (SEIS). A 50% income tax break for the investors made it easier to nudge up the cash they were willing to part with; plus the opportunity to sell their shares after three years – capital gains tax ‘free’ – made the investment even sweeter. Mark had pondered utilising this tax break on his own £10,000 investment into the company but decided that, on this occasion he wanted to retain more than 30% of the share capital (which precluded him from SEIS) – maybe next time…

This SEIS cash would be used to fund the R&D phase in employing a small team of developers. Given that the company was pre-revenue, Mark was able to claim a welcome tax refund from HM Revenue & Customs under the SME R&D tax credit scheme. This released in excess of £30,000 into the business which was promptly used to fund a further developer outside the SEIS funds to accelerate the project.

Having made significant inroads on the R&D work (whilst burning through in excess of 70% of the SEIS cash!), Mark approached investors for a further round of funding – this time under the Enterprise Investment Scheme (SEIS’s ‘big brother’!). A 30% income tax break this time for investors (plus potential for a capital gains free exit) provided sufficient enticement for investors to inject a further £2m into the company.

Meanwhile, whilst the R&D work was ongoing, Mark had made investigations regarding the potential for filing one or more patents on aspects of the underlying invention generated by the R&D work. With the arrival of the new Patent Box tax incentive from 1 April 2013, Mark knew that a 10% corporation tax rate by 2017 on worldwide income derived from qualifying patents could add additional value to his company as it approached an exit as well as releasing further much needed cash into the business from now until then.

Eyeing an exit in 3-5 years time, Mark ensured he retained at least 5% of the share capital post dilution at each funding round in order to secure a capital gains tax rate of just 10% on his first £10m of gains. His SEIS and EIS investors should be extra happy with a 0% capital gains tax rate after three years!

All in all, Mark had pulled the relevant statutory tax incentive levers to maximise the release of cash into his business at each stage of its life-cycle. What was this worth? It depends – the SEIS, R&D and EIS savings total approximately £700,000 but assuming a profitable few years under the the Patent Box and taking into account the above savings it is not difficult to reach overall pre-exit cash tax savings of £1m+.

Getting advice from the start can get you on the road to being a tax aware entrepreneur…

image credit:Creative Commons License Hartwig HKD via Compfight

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R&D tax credits: Need to know tax tips for entrepreneurs (webinar)

In this free webinar, Steve Livingston (Founder & MD of ip tax solutions) walks Founders and Entrepreneurs through the basics of the UK R&D tax credit incentive.

This is a ‘back to basics’ seminar for company founders / entrepreneurs who would like to learn more about the Research & Development tax incentive and whether it might apply to their business.

We cover:

  1. What it is and why it was introduced
  2. An overview of the (generous) tax benefits
  3. What companies qualify and qualifying costs
  4. The process for making a claim to HM Revenue & Customs
  5. Why you should consider this incentive for any business
  6. Q&A

This free webinar lasts 55mins

Steve Livingston is a chartered accountant and experienced tax advisor to entrepreneurs. He is also the founder of ip tax solutions, specialists in advising fast growth companies.

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When tax planning can be good!

Life is a precious gift. Don't waste it being unhappy, dissatisfied, or anything else you can be

Tax planning is getting a real battering at the moment – in some cases, for all the right reasons – but there are many instances where effective tax planning is essential for fast growth businesses and, in fact, positively encouraged by the government.

Aside from printing money to erode away much of our UK budget deficit (…), the Government appreciates that by encouraging entrepreneurs to build hi-tech companies here in the UK then we might have a fighting chance of seeing a brighter economic picture in the short-medium term.

To help us achieve this, the Government introduced 5 key statutory tax incentives that they absolutely and positively want entrepreneurs to claim:

  1. Enterprise Investment Scheme (EIS) / Seed Enterprise Investment Scheme (SEIS)
  2. Enterprise Management Incentive Scheme (EMI)
  3. R&D tax credits
  4. Patent Box
  5. Entrepreneur’s Relief 

As a chartered accountant specialising in advising fast growth companies in these areas – you can find plenty more about these tax incentives on this site or by getting in touch – in my view:

If all UK entrepreneurial businesses took advantage of these five statutory tax incentives (where applicable) and used the funds saved to reinvest in new jobs, new marketing channels and new business ventures; then surely we could reinvigorate our economy with fresh, innovative ip rich companies that can compete on a global scale

Enough of the ‘tax bashing’ – let’s make sure that our entrepreneurs have all of the tools necessary at their disposal if they are to get us back on top – an effective and supportive tax regime for entrepreneurs is one of them (and the good news in the UK is that – for now – we have one…).

Image attribution: @Doug88888 via Compfight

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