Boosting EBITDA with R&D tax credits
Innovation is at the heart of most companies strategy in this digital age, and is seen as critical to maintaining your competitive edge. With this in mind, Finance Directors and Heads of Tax are increasingly searching for ways to reduce the financial risk of innovative projects. And what better way than Government backed innovation incentives, which can often simultaneously boost EBITDA.
The most common innovation incentive in the UK is the R&D expenditure or tax credit which can, depending on the company’s size, result in a cash payment to the company of between 10-33% of the company’s qualifying expenditure. However, there are also a number of other incentives available in the UK, such as grants and Patent Box, and overseas where a company is carrying out development activities abroad.
The key is to maximise these incentives in a robust, streamlined manner that will deliver value to investors, boards and businesses alike. Three quick tips on how to do this are given below:
- Know what and where you can claim
Most finance professionals have a broad understanding of the R&D expenditure claim regime in the UK. However, there is a widespread misconception that companies only qualify if their staff wear lab coats or the company is involved in ‘blue sky’ research. In practice, I have yet to meet a company that cannot qualify to some extent. Successful claims have been made by estate agents, scaffolding companies, fast food chains and luxury shoe manufacturers, to name four less obvious industries.
In addition to the UK R&D regime, similar regimes exist in about 50 countries across the world, with the notable exception of Germany. The exact nature of the regime, for example what qualifies as R&D from a technical and costing perspective and how the regimes are administered and benefits accounted for, often differs. In the UK, the benefit is reported ‘above the line’ in ‘other operating income’ and, for loss making large companies is linked to payroll tax; whereas in France the CIR is particularly generous and qualifying expenditure includes patent costs and depreciation – both of which are non-qualifying costs in the UK.
In addition to R&D, there are also innovation and patent box regimes which serve to reduce the rate of tax payable on certain IP related profits and a whole range of grant incentives, such as Innovate UK, Eureka Networks, Eurostars and Horizon 2020. However, the position regarding the ability of UK companies to apply for European grants post-Brexit, still needs to be clarified.
In summary, having a good understanding of what incentives are available can ensure that you don’t miss out on what you are legally entitled to and put your business at a competitive disadvantage.
- Streamline the claims process
Making multiple claims across multiple jurisdictions may sound like a lot of work. Often one technical interview, costing collection workbook or R&D assessment schedule can be modified so that it can be used to collect the information required for several, if not all, of your claims. This can significantly reduce the workload of the finance team to prepare the claims and the amount of time the claimant group’s engineers need to spend in technical interviews.
When weighing up the costs and benefits of multiple incentives claims, it’s worth considering that the amount of work involved to achieve, for example 10% additional EBITDA and cash, compared to other ways of finding additional new revenue streams can be incredibly low.
- Plan ahead
By planning ahead, and locating your IP and R&D personnel in the most optimal location, it may be possible for groups to double, and in some instances quadruple, the size of the innovation related claims that can be made. This will allow you to make further investment in innovation and riskier projects, and could significantly boost operating profits.
Any restructuring should naturally follow how the business is actually run, the group’s commercial objectives and be aligned with the group’s internal recharges and transfer pricing policy. This is achievable with careful and considered upfront planning.
For more details on the international innovation regime landscape or any other aspect of this article, please contact Aman Nirwarl