Tips on boosting EBITDA and reducing the financial risk of projects at minimal extra time or cost
Innovation is the heart of most companies’ strategy in this digital age, as this is seen as critical to maintaining one’s competitive edge, writes Carrie Rutland, associate director in Innovation & Technology for BDO.
With this in mind, finance directors and heads of tax are increasingly searching for ways to reduce the financial risk of innovative projects. And what better way than Government backed innovation incentives, which can often simultaneously boost EBITDA?
The most common innovation incentive in the UK is the R & D expenditure/tax credit which can, depending on the company’s size, result in a cash payment to the company of between 10-33 per cent of the company’s qualifying expenditure.
However, there are also a number of other incentives available both in the UK, (such as grants and the patent box), and overseas where a company is also carrying out development activities abroad.
The key is to maximise these incentives in a robust, streamlined manner that will deliver value to investors, Boards and businesses alike. Three quick tips on how to do this are given below.
Know what and where you can claim
Most finance professionals have a broad understanding of the R & D expenditure claim regime in the UK. However, there is a widespread misconception that companies only qualify if their staff walk around in lab coats and/or the company is involved in blue sky research.
In practice, I have yet to meet a company that cannot qualify to some extent. Successful claims have been made by estate agents, scaffolding companies, fast food chains and luxury shoe manufacturers, to name but four less obvious industries. Indeed, imagination is your only constraint.
In addition to the UK R & D regime, there are also similar regimes exist in about 50 countries across the world, with the notable exception of Germany! The exact nature of the regime, for example what qualifies as R & D from a technical and costing perspective and how the regimes are administered and benefits accounted for often differs.
In the UK the benefit is reported ‘above the line’ in other operating income and, for loss making large companies is linked to payroll tax; whereas in France the CIR is particularly generous and qualifying expenditure includes patent costs and depreciation – both of which are non-qualifying costs in the UK.
In addition to R & D expenditure reliefs there are also innovation/patent box regimes which serve to reduce the rate of tax payable on certain IP related profits and a whole range of grant incentives, such as Innovate UK, Eureka Networks, Eurostars and Horizon 2020.
However, the position regarding the ability of UK companies to apply for European grants post-Brexit, (if it happens), still needs to be clarified.
In summary, having a good understanding of what incentives are available can ensure that a company doesn’t miss out on what it is legally entitled to and put itself at a competitive disadvantage.
Streamline the claims process
Making multiple claims in multiple jurisdictions may sound like a lot of work. However, it need not be. Often one technical interview, costing collection workbook or R & D assessment schedule can be modified so that it can be used to collect the information required for several if not all the claims. This can significantly reduce the workload of the finance team to prepare the claims and the amount of time the claimant group’s engineers need to spend in technical interviews.
In addition, when weighing up the costs and benefits of making multiple incentives claims, it is worth considering that the amount of work involved to achieve, for example 10 per cent additional EBITDA and cash, compared to other ways finding additional new revenue streams is actually incredibly low.
Finally, by planning ahead, and for example, locating the IP and the R & D personnel in the right place it may be possible for groups to double and in some instances quadruple the size of the innovation related claims that can be made.
This will allow them to make further investment in innovation and riskier projects and could significantly boost operating profits.
Any restructuring should obviously follow how the business is actually run and the group’s commercial objectives and be aligned with the group’s internal recharges and transfer pricing policy. This is all very achievable though with a little bit of careful upfront planning.
• For more details on the international innovation regime landscape or any other aspect of this article, contact Carrie Rutland – carrie.rutland [at] bdo.co.uk Mobile: +44 (0)78 7613 2175