Everyone likes a cash rebate, so why should CFOs and organisations be any different? In the current tough business environment, any initiative that could provide cash savings to help the bottom line, would be welcomed with open arms. I am therefore surprised to see that CFOs are still failing to make the most of the UK Government's R&D tax relief regime.
What are the potential R&D tax savings?
For large companies, the R&D Scheme provides, in Layman's terms, a net tax benefit of 7.2%-8.4% of qualifying revenue spend (benefit is falling due to the decrease in corporation tax) and it is possible to consider costs incurred in the claimant's last two accounting periods One way of looking at this is to think of it in terms of technical staff salaries – broadly, for every say twelve salaried full-time equivalent staff that work on R&D projects, one of their salaries will be wholly funded by the tax relief derived from the scheme. The Small or Medium size company (SME) relief is even more lucrative providing up to 30% net tax benefit on qualifying revenue spend.
Capitalised R&D expenditure attracts an immediate tax deduction in the year incurred as opposed to over 8-10 years at best or at worst, not at all – this can represent a significant cash flow accelerator for companies facing a tough economic environment.
But wait, there's more
Also, it's about to get even better, in April 2013 we are expecting the introduction of an "above the line" R&D tax credit. This will make the R&D relief significantly more attractive, introducing the opportunity to reduce operating costs, helping CFOs to drive even greater efficiency to their bottom line. The main beneficiaries of this new regime are expected to be:
- Companies with a focus on operating profit or Earnings Before Interest Tax Depreciation and Amortisation as a performance measure
- Large companies with tax losses will be able to obtain cash in respect of their qualifying R&D where before the timing of this would have been uncertain
- International groups in which saving UK tax causes an equivalent increase in taxes payable in the home jurisdiction.
Given that the transition may take effect from April 2013, companies need to review and understand the upcoming changes as this may affect budgeting for 2013, which for many businesses will begin in Q4 2012.
How can CFOs make the most of R&D tax relief?
Companies that invest in technology, whether developing or enhancing applications, processes, products, interfaces, integrating systems or seeking operational efficiencies may be able to claim R&D tax relief. However, while R&D tax benefits are now well established, few companies are taking full advantage of the potential gains available to them.
For example, we recently worked with a world leading food and consumer goods retailer who had invested £100m+ to transform its in-house finance and technical capabilities. Through effective management of an R&D claim for all of the eligible internal and external activities, the client was able to obtain over £5m of cash benefit
CFOs must appreciate the breadth of technical activities that may be eligible for R&D relief, and thus the opportunity to help fund costly IT investment. CFOs should consider the following questions:
- Are your technical teams up to speed on the definition of R&D for tax purposes?
- Are you carrying out R&D and if so, how much are you spending?
- Have you prepared an R&D claim? How much expenditure are you claiming as a deduction from tax?
- Is your tax team aware of the R&D scheme and on top of this?
- Are your technical teams capturing data to record R&D such as project time bookings and qualifying costs contemporaneously?
Organisations that can fully understand their R&D activities and make the most of R&D tax relief can potentially reap cash savings of £m's on projects.