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David Clift funding innovation seminar



Presentation by David Clift of Hazelwoods Solicitors, looking at how you can fund innovation in business.

Presentation by David Clift of Hazelwoods Solicitors, looking at how you can fund innovation in business.



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David Clift funding innovation seminar Presentation Transcript

  • 1. www.hazlewoods.co.uk Funding Innovation November 2010 David Clift Tax Director t: 01452 634800 e: [email_address]
  • 2. Sources of funding
    • External investment
    • Grants and other support
    • R&D tax incentives
  • 3. External investors – possible options
    • Bank
    • Business angels
    • Venture capitalists
  • 4. External investors
    • Bank debt:
    • Usually cheaper than other external finance, but currently difficult to obtain
    • Asset backing, personal guarantees etc
    • No ownership or control issues
    • Servicing the debt – impact on profitability, cashflow and prospect of other investment
  • 5. External investors
    • Business angels:
    • Wealthy individuals
    • Usually invest in companies, not sole traders
    • Typical investment level around £50,000
    • As individuals:
      • different attitudes to level of involvement in business
      • different skills and experience
      • – ensure appropriate ‘fit’ with you and your business
    • Angel Investment Networks – e.g. SWAIN
  • 6. External investors
    • Venture capitalists:
    • Varying investment criteria – seed funds, sectors etc
    • Investment level usually at least £250k, commonly £1m +
    • Typical exit 3 to 5 years
    • Usually expensive finance
    • Brings specialist skills in finance and industry
    • Availability of further funding
    • Often want large equity slice - Risk that you could effectively become “an employee in your own company”
  • 7. External investors
    • What they are interested in:
      • Business plan, background etc
      • What is unique / new about the offering?
      • Is valuable IP protected?
      • Management team
      • Market analysis and competitors
      • What will the business look like in 3 to 5 years’ time?
  • 8. Grants and other support
    • Essentially forward-looking
    • Often interested in a different ‘value add’
    • Grant for R&D? – current status
    • Other grant funding:
      • Technology Strategy Board calls
      • European funding e.g. Eurostars, FP7
      • Specialist funders e.g. Wellcome Trust, Carbon Trust
    • Knowledge Transfer Partnerships (‘KTP’)
  • 9. Research and development tax relief / credits
    • Brief background
    • The technical aspects
    • Some practical considerations
  • 10. What is R&D tax relief?
    • Government “subsidy” for companies which:
    • - incur expenditure on qualifying R&D, or
    • - carry out qualifying R&D, or
    • - both
    • Administered through the corporation tax self assessment.
  • 11. What is R&D tax relief?
    • Enhanced tax relief of
    • 175% of qualifying expenditure under SME scheme
    • - Additional tax saving of usually 15p-16p for every £1 qualifying R&D (at small companies rate)
    • - R&D tax losses can be ‘cashed in’ for a repayment of PAYE & NIC up to 24½p for every £1 qualifying R&D.
    • 130% of qualifying expenditure under large companies scheme
    • - Additional tax saving of usually around 8½p for every £1 qualifying R&D (assuming full rate)
    • - No option to ‘cash in’ losses
  • 12. SME Scheme
    • SME scheme is aimed at SME companies which FUND their own qualifying R&D
    • Expenditure must not be subsidised
    • A SME is a company with
        • Fewer than 500 employees AND:
        • Annual turnover of Euro 100m or less; OR
        • Total assets less than Euro 86m
  • 13. Large companies scheme
    • The large companies scheme is aimed at (ALL) companies which CARRY OUT qualifying R&D
    • Companies receiving government grants for a project can claim under the large scheme (for entire project)
    • Companies that receive funding from large companies can claim under the large scheme for the funded parts of the project (unfunded aspects under SME scheme)
  • 14. Is it R&D?
    • In order to qualify for R&D tax relief a project must
    • Represent an advance in science or technology
    • - Extend overall knowledge
    • - Appreciable improvement
    • Involve the resolution of scientific or technological uncertainty
    • (NB: significance of patents)
  • 15. Qualifying costs
    • Expenditure has to be revenue in nature and be at least £10,000 per year
    • Staffing costs and external workers
    • Software
    • Consumable items
    • Certain payments to sub-contractors (usually only under SME scheme)
  • 16. What is R&D in practice?
    • A project
    • “ Appreciable improvement”
    • “ Technological uncertainty”
    • “ Competent professional” benchmark
  • 17. What is R&D in practice?
    • In essence, 2 questions:
    • How is your product/process/material/device/service better than others?
    • Did you have to work through some fairly complex technical issues?
  • 18. Common misconceptions
    • “ We can’t claim because …
    • … Our business is not high technology”
    • New design of luxury golf equipment
    • Animal shearing equipment
    • … We don’t pay Corporation Tax”
    • Loss making dental instrument designer
    • … We don’t make a product”
    • Dental burr manufacturer – new production/manufacturing processes
    • Rail industry: lean line manufacturing
  • 19. Common misconceptions
    • “ We can’t claim because …
    • … Our R&D was unsuccessful”
    • … The R&D that we do is all paid for / funded”
    • Consulting Engineers – successful claim for fully funded work
    • … We capitalise the costs of our R&D in our accounts”
    • Manufacturer of specialist part for wind turbines: R&D claim turned taxable profits into tax losses and gave rise to substantial tax credits
  • 20. Why should you consider a claim?
    • Potential cash injection with ‘no strings’ on how to spend it
    • Effectively a source of funding with no impact on business ownership or control
    • Attractive for potential investors:
      • Indicative of innovative business
      • Reduced net cost of development work
      • Demonstrates good financial management and awareness
    • Paperwork not unduly onerous compared to other funding
  • 21. What to do?
    • Talk it through
    • Involve HMRC? (no advance clearance)
    • Estimate ‘ball park’ claim
    • Prepare claim
      • Full report?
      • A few pages?
    • File claim
      • tax repayment can be within 28 days
  • 22.
    • Not addressed in recent Comprehensive Spending Review
    • Dyson report :
    • “ The current system is well intentioned but not well targeted . A Conservative government should refocus R&D tax credits on high tech companies, small businesses and new start-ups in order to stimulate a new wave of technology. When the public finances allow, the rate should be increased to 200%”
    • “ As our economy seeks to re-balance over the months ahead, the government must recognise the value of the R&D tax credit and commit to retaining it and encouraging more firms to invest in research and development. It should also go further by building on its success; extending the rate and range of credit, enabling more companies to apply and covering more of their associated overheads.” Richard Lamber, Director-General CBI
    What does the future hold?
  • 23. Contact
    • David Clift
    • Tax Director
    • t: 01452 634800
    • e: david.clift@hazlewoods.co.uk
    • Hazlewoods LLP
    • Windsor House
    • Barnett Way
    • Barnwood
    • Gloucester
    • GL4 3RT