James Price's Blog : April 2010
R & D - Not just for men in white coats!
Monday, April 19 2010
When the R & D scheme was first introduced in the Year 2000 the uptake was minimal. HMRC’s own understanding of the scheme was poor and making a claim usually led to the company being subjected to a lengthy and poorly conducted enquiry which sought to undermine that claim.
Over time this has all changed. Awareness of the scheme and the number of claims being made has grown. With the introduction of dedicated HMRC R & D offices and specialist officers HMRC queries regarding claims, and the quality of interaction in general is more palatable for all involved. For instance, at WKH we have formed a good working relationship with officers at the
The R & D Tax Credit regime is the biggest single state funding mechanism available to businesses undertaking R & D[1]. During the 2006-07 tax year some 6,600 R & D claims totaling £670m were made, including 1,000 claims for payable tax credits worth £150m[2].
The SME scheme offers a 175% enhancement for qualifying R & D expenditure. This can go a fair way towards reducing the corporation tax bill, and for loss making companies (subject to a couple of rarely applicable parameters) a tax credit is payable by HMRC equivalent to 14% of the qualifying R & D losses – that equates to a cash receipt from HMRC of £24.50 for every £100 of qualifying expenditure. Whilst the regime may lag behind some of our fellow EU member states, what is on offer is still very much worth having.
However, the relatively low number of claimant companies must mean that many companies that could qualify for R & D relief miss out either because of unawareness or a misunderstanding of the scheme. R & D does not only extend to people in white coats working in laboratories. Projects undertaken by software houses, engineering firms, manufacturers, model-makers and any number of other business types can all qualify. Consider these questions for a moment:
“Are we trying to do something that involves having to develop scientific or technological knowledge that isn’t commonly available?” (For example, creating or appreciably improving a product, process or service can sometimes require you to develop this sort of know-how)
“What are the scientific or technological challenges we’ve had to overcome as part of this work?” (These have to be uncertainties that competent professionals can’t readily resolve, and where solutions aren’t common knowledge. Simply buying new technology and using it isn’t R&D, but adapting it or developing it for your own purposes might be)
If you can respond positively to these questions, then you could well be eligible for a claim under the R & D regime.
There really is no longer a reason to be put off making an R & D claim, particularly in these challenging economic times. If you think your company may qualify, and would like to discuss the issues in more detail please contact Graham Boar.
Making IP Pay
Tuesday, April 13 2010
The first step in making your intellectual property work for you is the recognition that your IP actually exists. Depending on their sector, there seem to be varying degrees of IP awareness. Software houses for example tend to appreciate the importance of copyright protection, very often though companies at the lower end of the technology spectrum are not aware of the value of a trade mark, or a product or process that they have developed.
Understandably, many small companies are reluctant to expend significant amounts of time and money on registering and protecting their intellectual property. Although these are undoubtedly significant considerations, what is often overlooked is the opportunity cost of not registering and protecting IP.
In fairness, we accountants don’t help! UK accounting rules make it very tricky for companies to recognise an internally generated intangible asset, such as IP, on their balance sheet.
Times though, do appear to be changing. The World Intellectual Property Organisation met in March 2009 to discuss how the financial potential of IP for companies can be better unlocked. This quote is from the WIPO website:
"In the current uncertain economic times, IP Financing is of growing economic importance. Global commerce in the emerging IP asset class is worth an estimated US 300 billion dollars world wide annually and some 80% of corporate value today is represented by intangible assets. The financial potential of IP assets is currently limited, however, by systems and policies that are still largely geared to tangible assets."
Although Business Angels and Venture Capitalists have a keen understanding of the importance of intellectual property, the issue seems less well understood by the mainstream lenders.
The majority of the loan security documents that we see may make mention of intellectual property, but these assets are normally just given and taken as security without much of a discussion. Whilst time, effort and money are expended on assessing the value of, say, a commercial property for the purposes of loan security, little or no attention is paid to the IP which may well be driving the profits that are made inside that property.
There is no real reason for this bias towards tangible assets. IP can do as much, if not more, to generate cash flows for businesses in future periods. As a business owner, having a handle of what that IP is worth has got to be of major interest. It could have a major impact on the value that owners can realise on an exit, and perhaps, of more relevance at this uncertain time, it may also help to obtain or renegotiate finance.
A further aspect to getting value from your IP is the Research & Development tax regime in the
Heading for an Exit?
Friday, April 9 2010
Back in September 2009 I considered the landscape for Management Buy Outs (MBOs) in the UK and at that time I wasn’t entirely sure that the Buy Out was back as some other commentators felt, but six months down the line based on the conversations we are having with clients here, at our sister company Precision* and from talking to other corporate financiers I would certainly say things have changed.
I think there are a few reasons for that:
- Increased business confidence in management teams
- Owners who do not wish to postpone their exit any longer
- Banks (slowly) starting to lend money again
However, whilst the appetite may have returned, an MBO remains a very tricky kind of a deal and when you analyse the main stakeholders, it’s easy to see why.
Management Team – can the team really look at itself and say it has the necessary skills and experience to form an effective leadership group when the owner leaves? There needs to be honesty here but a skills gap need not mean the end of the process and there are a number of ways to bridge the gap in the short term, the use of mentoring and top class non execs are a couple of examples. At the same time management will be expected by financiers to have some skin in the game – this might involve using savings to help fund the deal and/or the granting of a personal guarantee backed by a charge over their home. Not something to be taken lightly so they need to be totally convinced as to the prospects of the business.
Owner – clearly looking to realise value that will help them achieve their objectives in retirement, but over time it’s safe to say that close relationships will have developed with the management team and that might make negotiations about money and, further down the line, warranties & indemnities that bit more uncomfortable. Very often an MBO will not be the only option available to an owner and they have to be conscious of the impact that an MBO can have on the levels of focus from the management team – the last thing they want is for an MBO to fail leaving management disaffected, as this could affect the price that an external buyer might pay.
The Bank – on the one hand the bank will have a good feel for the business and the quality of management (whether that can be effectively communicated to underwriters these days, I don’t know), but on the other they may not share the owners’ view on what the business is worth. When I talk to bankers, the rule of thumb seems to be that where 3 years ago they may have lent a business 4/5 x Earnings Before Interest & Tax (EBIT) to fund an MBO, they will now only go to 2/3 x EBIT. The owners’ perception of value will generally be the same as it was 3 years ago and the result is a funding gap that has to be bridged either by funds from the management team, deferred consideration from the owner, or both.
This is just a flavour of the issues to consider when putting together an MBO and it is essential that a plan is drawn up to stand any chance of success. WKH are able to help with that, so do get in touch.
*On the subject of Precision Corporate Finance we were delighted to receive the Best Corporate Finance Boutique award at the Business Money Facts Awards in late March – check out the WKH news feed for more detail.
A Budget for Small Business?
Thursday, April 1 2010
I saw that headline in the aftermath of the budget speech and, on one level, I agree and I will outline the reasons why below, but I think to examine the impact on small business at a micro level is rather like ignoring the elephant in the room because without a strong UK economy at a macro level all we are doing is rearranging the deckchairs on the Titanic (that’s enough clichés – ed).
What remains rather unclear, deliberately so I am sure, is exactly what the Chancellor is going to do to reduce the public sector borrowing. What we do know is that the tax burden will increase, 50% rate of income tax, freezing of personal allowance, another National Insurance rise – all of these will boost the tax take, but what else does he have in mind?
- A vague reference was made to clamping down on the exploitation of tax loopholes. Much was made of new agreements made with low tax regimes around the world (notably
Belize!) so the Chancellor is probably looking at the artificial movement of income out of the UK. Something to concern global players more than the SME market but we can expect some tougher anti-avoidance legislation. - An even more vague reference to public sector spending cuts then followed but it will be after the General Election before we get the detail there.
- The final ingredient is economic growth which, when present, both increases tax revenues and reduces public spending in areas such as unemployment benefit.
Certainly I can understand a level of scepticism around the Chancellor’s economic growth forecast of 3-3.5% for the next 12 months, but on the other hand I wouldn’t put any more faith in forecasts from the economists that pop up from academia around this time every year. As an economics graduate one thing I am sure of is that academics are not averse to courting controversy, and for every economist who is proved right there are at least double that number proved wrong.
So, why do I agree that it was a “budget for small business”?
- Extension of the limit of Entrepreneur’s Relief from £1m up to £2m. This could be worth up to an £80,000 tax saving when selling business assets. For how long the 18% mainstream rate of CGT and Entrepreneur’s Relief, will remain in place is anyone’s guess. Personally I wouldn’t put money on it lasting one more budget. If this focuses your mind on selling your business sooner rather than later, we are on hand to help.
- Additional borrowing pledges for RBS and Lloyds, plus a new independent review body to scrutinise rejected credit proposals for strong businesses. Quite what this will translate to in terms of ground level impact is anyone’s guess, but we live in hope.
- The Annual Investment Allowance which gives a 100% deduction for qualifying plant has been increased to £100,000.
- HMRC’s Time to Pay scheme will be extended until further notice. This remains a valuable working capital tool for business, though if you have arrears of over £1m you will now need to commission an Independent Business Review from an approved panel of external companies – mainly national accountancy firms – and that will come at a cost.
- Some welcome relief from Business Rates for those occupying small commercial properties.
If there are any aspects of the budget that concern or interest you please get in touch with either myself or your regular WKH contact.
Email: jprice@wkhca.co.uk
Tel: 01462 687333
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