R&D Tax Incentives Improving your cash position Justin Arnesen - - PowerPoint PPT Presentation

R&D Tax Incentives

Justin Arnesen

Smith & Williamson Partner – R&D Tax & Government Grants

Improving your cash position

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 the industry’s R&D tax incentive claims

71% 18%

8%

3% 1% 52% 34%

2%

11% 0.3%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Services Manufacturing Construction Other Agriculture

GDP Contribution R&D Expenditure Contribution Construction GDP Contribution = 8% Construction R&D Expenditure = 2%

“ “

R&D spend as a % of Turnover (R&D Intensity)

5.5% 3.3% 2.4% 1.7% 1.5% 1.3% 1.2% 1.0% 1.0% 0.4% 0.1% Average R&D Intensity: 0.65%

Source: Companies House

Recap: What are the numbers?

49 17 1.7% 2.5% £100bn £95m £650m £1.8tn 2.4% 2-4 0.65%

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

• vercome 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

EPW

• r

Sub Staff Software Outsourced Works Consumables

Direct staff make up a majority

• f the claim. Indirect and

senior management should also be included. Firms should understand the support activities within the company which enable R&D. Understanding the industry and typical commercial relationships with 3rd parties is critical to the claim. Scrap materials and utility costs should be considered for claim purposes.

Qualifying Costing Categories

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 Discussions Financial Discussions Report Development Quality Check Submission

• Confirm the potential

benefits and risks

• Understand clients

business activities

• Team members skilled in both technical

and financial areas

• Interchangeable roles
• Comprehensive technical discussions
• Extracting the ultimate financial value
• Experienced

professionals scrutinise the final report

• Collaboration with the

client’s technical personnel

• Management of

potential risks

• Engage with clients

technical experts

• Relevant report/s
• Tailored to meet

HMRC requirements

• Claim submission
• S&W defend the

report/claim

&

Specialist R&D consultants differentiate themselves by embedding their technical and financial experts into the clients’ organisation. 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

R&D spend as a % of Turnover (R&D Intensity)

5.5% 3.3% 2.4% 1.7% 1.5% 1.3% 1.2% 1.0% 1.0% 0.4% 0.1% Average R&D Intensity: 0.65%

Source: Companies House

Areas of Opportunity

• 1. Corporate &

project level innovation

• 2. Core &

supporting activities

• 3. Prospective

R&D

Utilising the R&D Tax incentive to assist with strategic decision making Establishing R&D departments and generating claims against projects Opportunities to consider when claiming R&D

• 1. Most companies consider ring-

fenced areas (easily identifiable) such as innovation departments, R&D centres, NPD etc.

• 2. The bulk of expenditure that

companies incur relates to spend on

• perational or project level

innovation i.e. staff overcoming projects specific problems or creating project specific innovation/novelty.

Company A Operations Project A Project B Support R&D Department

Missed Opportunities Ring-Fenced R&D

Corporate and project level innovation

Expanding the R&D boundaries: Improving eligible R&D QE by increasing the scope of review

Concept Design Detailed Design On-site Trials Implementation

Normal Scope Expanded Scope

Cost R&D % QE Benefit

80% 30% 30% 10% Low Med High High £

££

£££

££££

There is significant R&D activity within conceptual design stages but the costs are low resulting in companies under claiming. Integrating project elements introduces new challenges and uncertainties for technical experts. When on-site trials take place, there are new learnings which add to the R&D activities and associated QE. QE is exponentially greater when the boundaries of R&D activities are expanded to the project implementation phase.

Core and supporting activities

EPW

Direct staff Indirect Staff EPW’s Senior Management

Many firms do not account the full proportion of direct staff. Firms should understand the support activities within the company which enable R&D. Understanding the relationship with sub- contractors is critical to the claim. Depending on the nature of work, senior manager cost can also be calculated into the claim Software licences and utility costs should also be considered

Status Quo Future Concept

Information Gathering

Difficult to recall projects in the past and identify R&D elements Ability to capture all elements of R&D as PM’s are aware of the project

Cash Flow Impact

Negative cash flow as realisation is +24 months after R&D Positive cash flow as the benefit can be realised as quick as 6 weeks after submission

Decision Making

Unable to use the R&D Tax benefit as a driver in the business Utilising R&D Tax within the business as a strategic driver in tenders and ROI projects

Competitive Impact

Low competitive impact if industry competitors are claiming R&D Tax High competitive impact as results are realised timeously Limited consideration for

• utsourced elements

Enabling strategic/ commercial relationships within the supply chain

Outsourced R&D

What if…

What if….

The construction sector is currently claiming, on average, 0.65% of turnover as R&D expenditure.

• 500

1,000 1,500 2,000 2,500 3,000 Construction 0.65% Overall 1.7% Aspirational 2.4% +£3.5bn +£7bn £millions +£1,050 QE +£158 “cash” +£1,750 QE +£262 “cash” +£2.1bn +£4.2bn

Turnover Average Profitability @ 2.5% R&D Intensity (2% - 4% of Turnover) Net R&D Tax Benefit Net R&D Benefit as a % of Profit Additional 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)

Positive impact of R&D tax incentives

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 Technological Advancements

• 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.

• 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.

Heavy beam construction

The project consisted of developing a new construction methodology to install heavily reinforced capping beams over piles to speed up construction and reduce the health and safety risks on the project.

Technological Uncertainties Technological Advancements

• Develop a hybrid construction sequence allowing the maximum

amount of prefabrication

• Develop a new way to connect the capping beams onto the main

beam element; and

• To turn this into a cost-effective, reliable and reproducible process to

enable future similar installations to be more efficient and safer.

• No similar solution so initials designs were

moderated and tested to produce the final solution; and

• Extensive modifications to the initial solution

including:

• New holding bolts designed.
• Installation of welded guide bars.
• Re-design of some prefabricated

elements.