R&D Tax Incentives Improving your cash position Justin Arnesen Smith & Williamson Partner – R&D Tax & Government Grants
Agenda • The R&D Landscape • R&D Tax Rules, Costs & Benefits • What do I need to do? • How to maximise R&D claims • Conclusion & Questions • What if… • Appendix – Case Studies
The R&D Landscape
Source: OECD, Main Science and Technology Indicators Database, http://oe.cd/msti July 2018 *Latest available data prior to 2016
UK R&D Tax Incentive Claims HMRC R&D tax credit statistics – Sep 2018
R&D Tax – Construction Industry Given the GDP contribution of the construction industry, there is significant scope to increase 80% the industry’s R&D tax incentive claims 71% 70% “ Construction GDP Contribution = 8% 60% Construction R&D Expenditure = 2% 52% “ 50% 40% 34% 30% 18% 20% 11% 8% 10% 2% 3% 1% 0.3% 0% Services Manufacturing Construction Other Agriculture GDP Contribution R&D Expenditure Contribution
5.5% R&D spend as a % of Turnover (R&D Intensity) Average R&D Intensity: 3.3% 0.65% 2.4% 1.7% 1.5% 1.3% 1.2% 1.0% 1.0% 0.4% 0.1% Source: Companies House
Recap: What are the numbers? 1.7% 49 17 £1.8tn £100bn £650m 0.65% 2.4% 2.5% £95m 2-4
R&D Tax Rules, Costs & Benefits
R&D takes place when a company seeks to advance a field of science or technology through the resolution of scientific or technological uncertainty. 1. Are you developing a new or improved product, process, material, device or service; OR 2. Are you extending the knowledge or capability within your industry “An Advance” In order to achieve the “Advance”, did Ramboll overcome scientific or technological uncertainty (“STU”)? - Easily resolved by competent professionals (“CP”) - Could the CPs refer to publicly available knowledge - Were the uncertainties trivial Core Eligible R&D
Qualifying Costing Categories Outsourced Works EPW Understanding the industry Staff or Direct staff make up a majority and typical commercial Sub of the claim. Indirect and relationships with 3rd parties senior management should is critical to the claim. also be included. Consumables Software Scrap materials and utility costs should be considered for claim Firms should understand purposes. the support activities within the company which enable R&D. The R&D regime is prescriptive when it comes to the type of expenditure that can be claimed.
Be inspired… SME / Large Co How is the R&D benefit derived
What do I need to do?
R&D Claim Process On- boarding Technical Financial Quality Report & Submission Discussions Discussions Development Check • • • • • Confirm the potential Team members skilled in both technical Engage with clients Experienced Claim submission • benefits and risks and financial areas technical experts professionals scrutinise S&W defend the • • • Understand clients Interchangeable roles Relevant report/s the final report report/claim • • • business activities Comprehensive technical discussions Tailored to meet Collaboration with the • Extracting the ultimate financial value HMRC client’s technical requirements personnel • Management of potential risks Specialist R&D consultants differentiate themselves by embedding their technical and financial experts into the clients’ orga nisation. This enables them to maximise the value extracted for the client, identify missed opportunities and allow the client’s staff to focus on their work.
How to maximise R&D claims
5.5% R&D spend as a % of Turnover (R&D Intensity) Average R&D Intensity: 3.3% 0.65% 2.4% 1.7% 1.5% 1.3% 1.2% 1.0% 1.0% 0.4% 0.1% Source: Companies House
Areas of Opportunity 1. Corporate & Establishing R&D departments project level and generating claims against innovation projects 2. Core & Opportunities to consider when supporting claiming R&D activities 3. Prospective Utilising the R&D Tax incentive to assist with strategic decision R&D making
Corporate and project level innovation Company A 1. Most companies consider ring- fenced areas (easily identifiable) such as innovation departments, R&D centres, NPD etc. Operations Support 2. The bulk of expenditure that companies incur relates to spend on R&D Project A Project B operational or project level Department innovation i.e. staff overcoming projects specific problems or creating project specific Missed Opportunities Ring-Fenced R&D innovation/novelty .
Expanding the R&D boundaries: Improving eligible R&D QE by increasing the scope of review Normal Scope Expanded Scope Concept Design Detailed Design On-site Trials Implementation There is significant R&D Integrating project elements When on-site trials take QE is exponentially greater activity within conceptual introduces new challenges place, there are new when the boundaries of R&D design stages but the costs and uncertainties for learnings which add to the activities are expanded to the are low resulting in technical experts. R&D activities and associated project implementation companies under claiming. QE. phase. R&D % 80% 30% 30% 10% Low Med High High Cost ££££ £££ ££ £ QE Benefit
Core and supporting activities EPW’s Direct staff Understanding the EPW Many firms do not relationship with sub- account the full contractors is critical to proportion of direct the claim. staff. Senior Management Indirect Staff Depending on the nature of Firms should work, senior manager cost understand the support can also be calculated into activities within the the claim company which enable R&D. Software licences and utility costs should also be considered
Status Quo Future Concept Difficult to recall projects Ability to capture all elements of Information in the past and identify R&D as PM’s are aware of the Gathering R&D elements project Negative cash flow as Positive cash flow as the benefit can Cash Flow realisation is +24 months be realised as quick as 6 weeks after Impact after R&D submission Unable to use the R&D Tax Utilising R&D Tax within the Decision benefit as a driver in the business as a strategic driver in Making business tenders and ROI projects Low competitive impact if Competitive High competitive impact as industry competitors are results are realised timeously Impact claiming R&D Tax Enabling strategic/ commercial Outsourced Limited consideration for relationships within the supply outsourced elements R&D chain
What if…
What if…. 3,000 +£1,750 QE +£262 “cash” 2,500 +£1,050 QE +£158 “cash” 2,000 1,500 +£3.5bn 1,000 +£7bn 500 +£2.1bn +£4.2bn £millions - Construction Overall Aspirational 0.65% 1.7% 2.4% The construction sector is currently claiming, on average, 0.65% of turnover as R&D expenditure.
Positive impact of R&D tax incentives R&D Intensity Net R&D Tax Net R&D Benefit Turnover Average Additional Profitability @ (2% - 4% of Benefit as a % of Profit Turnover 2.5% Turnover) required to make this benefit £50m £1.25m £1m - £2m £250k - £500k * 20% - 40% £10m - £20m £100m £2.5m £2m - £4m £175k - £350k ** 7 - 14% £8m - £16m £250m £6.25m £5m - £10m £440k - £880k ** 7 - 14% £22m - £44m £500m £12.5m £10m - £20m £880k - £1.76m 7 - 14% £44m - £88m ** £1bn £25m £20m - £40m £1.76m - £3.5m 7 - 14% £88m - £175m ** * SME Regime benefit at 25% of R&D Intensity (“Qualifying Expenditure”) ** RDEC benefit at 8.8% of QE (includes rounding)
Conclusion & Questions
Conclusion Construction & Engineering sector is not maximising R&D tax incentives Many ways and means to identify more R&D which will significantly increase the quantum of expenditure R&D tax incentives can significantly improve your bottom line
Questions Justin Arnesen – Partner – R&D Tax & Government Grants Email: justin.arnesen@smithandwilliamson.com D: 020 7131 8788 M: 07825 364 066
Appendix – Case Studies
Emerson Green Bridge The 52m span Emerson Green East cycle footbridge was the first of its kind, comprising a fibre reinforced polymer (FRP) carbon fibre arch supporting an underslung glass fibre deck. Technological Uncertainties • There are no methods of design and construction using FRP materials for bridge structures; • No specific published Design Codes and Product Standards for bridge structures using FRP; and • Extensive research and testing was needed to ascertain material properties, validate behaviour and performance. Technological Advancements • The use of these materials in this way was novel and more cost effective due to reduced self-weight and in-service maintenance requirements; • Established guidance documents for design and testing to develop a capability of designing this bridge; and • Developed a monitoring plan for the structure.
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