Future 50: Get credit for research

Startup concept. Laptop on wooden table and and icon network connection with rocket icon flying out

Businesses may strain finances unnecessarily by missing tax relief for R&D - Credit: Getty Images/iStockphoto

The Future 50 programme looked at financial management – including the importance of tax credits for R&D.

The Future 50 programme for East Anglia’s most promising high-growth businesses continued this month with an online workshop on financial management. Hosted by accountancy firm Lovewell Blake, three specialists looked at topical aspects of finance.

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The Future 50 programme is supported by the partner businesses - Credit: Archant

Lovewell Blake partner Mary Schofield provided an overview of the often-overlooked R&D tax credits system. “It is available only to companies – there's no equivalent tax relief rolled out to partnerships or sole traders,” she said. This may affect when a start-up incorporates, to take advantage of this specific tax relief if there is substantial R&D to be done. 

There are two schemes for R&D tax relief: the SME scheme, usually for companies with fewer than 500 employees; and the large-business scheme, though some SMEs may apply to it if they receive grants or subsidies that mean they don’t qualify for the SME scheme. “If you get offered a grant, you’re not going to turn it down, but it’s important to understand how it will impact your R&D claim,” stressed Mrs Schofield.

The guidance on what kind of activity qualifies for R&D tax credits is complicated, but qualifying expenditure can be set against profits that are liable for corporation tax – and benefit from a super-deduction. A business that registers a loss may be able to claim a tax credit, which can be very good for cash flow.

Qualifying expenditure falls under well-defined categories. The main ones are staff costs (salaries, employers NI and pension contributions but no benefit-in-kind payments) and the software and consumables used in the research process. The cost of freelance or agency workers and the cost sub-contracted companies also qualify, but capped at 65%.

Staff software development R&D tax credits

Qualifying expenditure for R&D is well defined and includes staff costs, software and consumables - and applies to unsuccessful projects as well as successful ones. - Credit: Getty Images/iStockphoto

If a business incurs qualifying expenditure of £100,000 in an accounting period, it not only gets tax relief on that £100,000 but also for an additional £130,000 superdeduction – a total of £230,000. So at a rate of 19%, that can be a tax saving of £43,700. 

Businesses that fall below the corporation-tax threshold or register a loss can apply for a repayable credit, rather than relief. Using the same example figures, the same £230,000 – which would have increased a loss for tax purposes – can be surrendered at a rate of 14.5%, which works out at £33,350. “So this is a very important tax relief for loss-making businesses, for cash flow purposes,” says Mrs Schofield. 

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R&D relief applies to unsuccessful projects as well as ones which succeed. “You can throw money at something that just doesn’t come off,” says Mrs Schofield. “But you can still make a claim, which can soften the blow.” 

Use of R&D tax relief is a highly specialist area – only 30% of Future 50 companies polled at the webinar currently take advantage of it. However, it can make a huge difference to new and expanding businesses, so specialist advice from an accountant experienced in the area is recommended.

Lovewell Blake Partner James Shipp also talked the Future 50 members through the pros and cons of investing in an electric vehicle as a company car. While the costs to both employers and drivers diminished the use of traditional internal-combustion fleet vehicles, the incentives around low- and zero-emission electric cars now make them worth considering. 

Audi eTron GT electric car tax offset benefit in kind

Investing in an EV like the Audi eTron as a company car might make sense if there are excess profits to offset - Credit: PA Images/Audi

The attraction of an electric car is that 100% of the purchase price can be offset against profits, with no benefit-in-kind penalty for the driver. The catch is that while a company may have significant excess profits to offset at the point of purchase, cars tend to be a three-to-four-year investment so the business needs confidence over that period.

Sam Grimmer from Lovewell Blake’s Corporate Finance team wrapped up with a look at the working capital cycle - a critical element of effective financial management. It all hinges on carefully balancing both assets and liabilities to ensure that all the money in a company doesn’t get locked up, as even profitable businesses can fail if cashflow dries up. Maintaining a practical level of working capital makes it easier to manage cashflow and also maximises the value in a company for the owners. 

Next month Future 50 will have an HR and talent workshop.
 

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