Engineering companies – HMRC want your evidence of the impact on your business of proposed changes to the R&D Tax Relief to exclude materials from R&D claims

On 29th January Tait Walker, and our R&D Advisory Group colleagues from MHA, had a very helpful meeting in London with a senior central policy adviser from HMRC in regard to two major changes proposed to the R&D Tax Relief regime:

  • The removal of materials as a qualifying cost in R&D claims where those materials are included in an item which is then sold on to a customer (we strongly believe this change is badly targeted and will impact the economy of the North East unequally compared to some other regions)
  • The Advance Assurance process which will be introduced (which we think is a good idea and which we support provided that it ensures that applicants ask informed questions so they get the right answers!)

In both cases, HMRC are actively seeking feedback about why they should, or should not, make the changes proposed.

In respect of the proposed removal of materials as a qualifying cost where they are sold on to a customer, the feedback from HMRC was as follows:

  • The primary reason for the change is that they have seen, mainly from large company claims, that a significant amount of items that are produced in factory production and then sold to customers are now being included in claims, with the justification being that there was a trial of a new production process occurring at the same time.
  • They had not aimed the changes at producers of “first in class” items – but they accepted that they would be caught.
  • They accepted that this would take us back to the position that existed prior to 2009 whereby, if a first in class item was developed as a speculative project (i.e. a proof of prototype) and that item was then sold, the material costs would have to be excluded.
  • They accept that this change will reduce the benefit of R&D claims mainly for engineering and manufacturing businesses, but they also accept that they had not looked at the impact on a regional basis in regards to where the impact on manufacturing or engineering would be greatest.

We believe that this is highly detrimental to engineering businesses who invest in new prototypes.  For example, we have assisted numerous companies to claim in relation to entirely speculative projects where having proved the prototype worked (at significant cost and financial risk to the company), a buyer then approached the company with an offer to purchase the prototype.

This change will impact many companies who engineer or manufacture “first in class” or “prototype” items and will materially reduce their R&D Tax Relief claims. For companies who are developing new first in class or prototype items, this can often represent a significant element of their qualifying costs under the current rules.

It will also impact heavily on areas where manufacturing and engineering is a key part of the economy.  It is notable that this would include areas such as the North East, the North West, the Midlands, Wales and Scotland, whereas areas that are not heavily reliant on manufacturing, such as London and the South East, would not be affected so badly.

The North East has, for example, more than 10,000 people employed in the Offshore & Marine Engineering sector with more than 50 companies directly in the supply chain and many more indirectly involved. Many of these companies develop world leading technology and rely on R&D claims to help to encourage investment in new products and encourage greater R&D staffing.

The good news is HMRC are willing to listen to businesses that will be affected. We have already had feedback from a range of companies across our region which we will provide to HMRC on a no names basis – but we would like more.

If you own, or manage, an engineering business that carries out development of first in class items or prototypes, please complete our questionnaire so that we can feed the results back to HMRC as evidence of why this change is detrimental to manufacturing.

The survey is here:

https://www.surveymonkey.com/r/53QLX96

If you have any further questions regarding HMRC’s proposed changes and your engineering business, please contact Alastair Wilson on 0191 285 0321 or email alastair.wilson@taitwalker.co.uk.

Great news for manufacturers in England who want to enter or expand their presence in the growing nuclear sector…

Developed by the Nuclear Advanced Manufacturing Research Centre (Nuclear AMRC) and delivered in partnership with the Manufacturing Advisory Service (MAS), Fit For Nuclear (F4N) is offering grants of around £10,000 to companies that want to meet industry standards and compete for work in civil nuclear.

This £1.5m funding call has been unveiled to help manufacturers in England to enhance their presence in the nuclear world. It will allow management teams to drive business improvements in areas such as improved manufacturing processes, factory layout, bid writing, training plans and strategy.

Manufacturers can apply for the funding to support R&D projects or develop new products, as well as accessing Nuclear ARMC’s workshop capabilities. All projects need to be completed by 31st March 2016 – firms are urged to apply as soon as possible.

Backed by partners including Areva and EDF Energy, Fit For Nuclear will give manufacturers a clearer understanding of supplier expectations and performance benchmarks, and give access to Nuclear AMRC’s R&D capabilities.

For further information, please click here.

Don’t miss out on your chance to apply for Growth Vouchers…

In January 2014 the Growth Vouchers programme launched a £30m fund aimed at encouraging small businesses to seek professional advice to help address key business issues such as raising finance, managing staffing costs and implementing company pension schemes in line with new Auto Enrolment rules.

The scheme is open to any business based in England that has been running for over one year, has fewer than 49 employees and has not sought “strategic advice” in the last three years.

However, the programme closes to new applicants on 31st March 2015 – so you only have 9 weeks to apply and benefit from the scheme.

From this date, businesses who wish to apply need to:

  • Be registered in England
  • Have less than 250 employees
  • Be actively selling goods and/or services
  • Have a turnover no greater than €50m or £45m
  • Own 75% or more of their business

Why Growth Vouchers?

Statistically, businesses are more likely to grow and succeed if they have a ‘financial business plan’ in place. However, there are many areas in which an equivalent business plan will also help to generate growth and help to focus the direction of the business. The Growth Vouchers programme recognises this and provides the ability to seek financial support for advice across a range of key business areas.

How to apply

The Growth Voucher application process can be accessed here.

Following submission you will be contacted and advised on the next steps (if successful).

Some happy Growth Vouchers Users…..

Snuggle Sacs

“The process to apply for a Growth Voucher was incredibly simple. The [face-to-face] meeting delivered a lot of focus and positivity about how we should invest in advice and really helped me to narrow down the brief.”

Banners and Mash

“In a matter of days, I had spoken to an adviser from the Marketplace and scheduled a follow-up call to discuss our business plans. The Marketplace was very easy to follow and it was very clear which businesses were Growth Voucher approved suppliers.”

Engineering companies, please help us try to persuade HMRC not to change the R&D Tax Relief regime…

Is your business an engineering or manufacturing company which produces “bespoke” or “first in class” products?  If so, we urgently need your help to try to persuade HMRC not to implement a change which could adversely affect your business!

In the Autumn Statement HMRC announced that they propose to change the R&D tax relief claims system, to exclude the cost of materials included in the bespoke items (or first in class items) from any R&D Tax Relief claims from 1 April 2015 if those items are then sold to customers.

Under the current law, it is possible to include within R&D Tax Relief claims the costs of materials consumed in the development process which are then included in the item sold.

For development projects relating to high value items such as offshore equipment, vehicles or other plant and machinery which is developed and then sold these costs can make up a sizeable part of the R&D Tax Relief claims made by engineering companies.

These changes will in many instances substantially reduce the benefit of R&D tax relief claims for companies who produce bespoke items, or “first in class” items.

We believe that these changes will have a negative financial impact on businesses in the sector, at a time when the finances of many engineering companies remain fragile and sources of finance are still hard to come by.  For example, for the offshore sector, we believe that this change will have a negative impact at a time where many oil companies are already cutting investment.

We believe it will also adversely affect the innovative business culture the Government state they are seeking to promote.  It could discourage many engineering companies from entering into contracts to develop “first in class” products which otherwise would have benefitted from Government support in the form of tax credits.

HMRC are currently consulting on the changes and we want to present HMRC with direct feedback from companies who will be affected by the proposed changes, the consultation closes on 4th February 2015.

We would therefore be grateful if you could complete the brief survey on the link below.    We will compile the results in a letter to HMRC and the Treasury on a “no names” basis so no individual companies will be identified, but the survey will provide factual evidence of the potential impact on the future growth of the engineering sector in the North East of England.

It should only take you a few minutes to complete, thanks in advance.

https://www.surveymonkey.com/r/53QLX96

Changes to the petition level on bankruptcies – will this help or hinder?

TURNAROUND AND INSOLVENCY

Discussions have been taking place regarding the level of debt required before petitioning for bankruptcy. It has now been confirmed that the proposed level will be increased from £750 to £5,000 – this is the first rise in limits since 1986.

It is expected that this rise will take place in October 2015 however this still has to undergo parliamentary scrutiny.

The industry as a whole has been in agreement for some time that £750 is no longer appropriate so a rise was inevitable. However the jump to £5,000 is in my opinion too high and leaves creditors with limited options.

Is it really appropriate that creditors may have to look at the small claims court to try to obtain payment if the debt is less than £5,000?

Creditors have sometimes used the threat of bankruptcy to force the issue of payment with the debtor, and in some cases the debtor has the ability to pay but has failed to do so –  if creditors no longer have the threat of bankruptcy, does this reduce the sanctions that they have to encourage payment?

My experience with the Courts is that they are highly unlikely to allow a bankruptcy order on such a small debt, unless other avenues have been explored first and it can be demonstrated that the debtor has either failed to engage with the creditor or tried to find a solution.

On the other hand, it is agreed that the limit of £750 is too low and when the limit was set in 1986, all other amounts were equally proportionate to the debt limit. The possibility of losing your house for the £750 amount is clearly disproportionate.

The question I would ask is, in practise, how often does a creditor actually petition based on a petition debt of £750? My experience is that this does not happen often, whether that is because the creditor does not want to incur the costs associated with petitioning based on that level of debt or whether by virtue of the Courts being unwilling to allow proceedings to go ahead I cannot say, but in all my years dealing with insolvency I have not seen a petition debt listed totalling £750.

My experience of creditors’ petitioning for a debt of a few thousand pounds does occur and the reality is that this level of debt is enough to impact on a small business and can in turn result in the failure of that business or that individual. Therefore I think the Insolvency Service and the Parliamentary Committee needs to consider the impact of not having the bankruptcy option available to creditors for debts lower than £5,000.

I would hope that while the level of the petition debt is increased from its current level, that the amount expected in October 2015 is reviewed and decreased accordingly, but clearly we will need to await the scrutiny and see whether others feel the same as I do.

For further advice, please contact Lynn Marshall on 0191 285 0321 or email lynn.marshall@taitwalker.co.uk.

Day 5 – Buying a Business

CORPORATE FINANCE

Buying a Business: Post deal integration

In the final instalment of our series of guides looking at how to buy a business, our Corporate Finance team offer advice on how to integrate the acquisition into your business.

Integrating two businesses after an acquisition is often more challenging than bringing the deal to fruition. Many acquisitions fail to add value, and some actually destroy it, because the purchaser is not properly prepared for what happens next.

Achieving the completion often feels like the end point has been reached – but in fact it really means that you are at the start line and are waiting for the gun to fire.

It is essential to keep your own team motivated, while bringing in new people who might be used to operating in a different culture. As a result, personal tensions, uncertainties and misunderstandings can lead to lost productivity.

To counter this, you should prepare well ahead of completion for ‘day one’. This means identifying urgent tasks that should be set out in a detailed plan, and set in motion before the ink is dry on the contract.

The first 100 days after completion are absolutely critical. This is the formative period during which you can accomplish early wins, while laying firm foundations for the future.

Clear communication with all stakeholders is pivotal to the integration process. Customers, employees, investors, suppliers, and even, in some cases, the local community need to understand what the acquisition means for them.

The importance of sound leadership at all levels cannot be overstated. Decide well ahead of completion on key management positions. An effective integration plan must set out clear responsibilities and lines of reporting that are universally understood.  And, above all, it must be carried out.

Day 4 – Buying a Business

CORPORATE FINANCE

Buying a Business: Deal structure and funding

In the fourth of a series of guides looking at how to buy a business, our Corporate Finance team offer tips and advice for structuring and funding a deal.

All forms of external funding are expensive and time consuming to secure.  Often the cheapest way to finance an acquisition is to use your own resources.

The more cash you can put into a purchase, the less you need to borrow from a bank and the less equity you will need to give away to an investor. So it’s worth looking into your cash position and perhaps considering selling non-core assets to part-fund a deal.

Debt funding from a bank is at the core of most funding structures. To obtain this type of funding you must usually be able to demonstrate that security is available and also that post acquisition you will have strong cash flows to enable you to comfortably service the loan.

Raising funds secured against a business’ debtors is now very common and is no longer looked upon as something only businesses in financial difficulties would carry out. It is called invoice discounting and is a flexible source of finance that that can sit alongside other funding options. It is well-suited to fast-growing businesses because it links your sales ledger directly to your credit facility. This means funding grows in direct proportion to business expansion.

Private equity and venture capital involves selling a proportion of the ownership of your company in return for investment. This reduces your control of your business, but PE/VC investors often bring valuable commercial expertise to a business. Businesses which are attractive to PE/VC investors will all share the characteristic of exhibiting very strong growth prospects.

Day 3 – Buying a Business

CORPORATE FINANCE

Buying a Business: Conducting due diligence

In the third of a series of guides looking at how to buy a business, our Corporate Finance team offer tips and advice on conducting due diligence on a target business.

When an offer has been accepted, the prospective purchaser should be allowed access to the vendor’s accounting, taxation, commercial and legal books and records. This investigative process is known as due diligence and carrying it out as thoroughly, and reasonably, as possible enables the buyer to confirm the target is worth buying.

Due diligence will provide sound information about the target’s current and future performance. The process should also expose any problems that may need to be addressed through warranties or guarantees – or even a reduced purchase price.

Theoretically due diligence should have as wide a scope as possible. In practice, due to time and budget constraints, and a need to maintain the momentum of the purchase (and the goodwill of the seller), it will be focussed upon the risk areas of the business that could have a material effect on the target’s value to the buyer.

Traditionally, there are three areas of due diligence: financial, legal, and commercial.  The latter typically examines issues such as the target’s customer base and regulatory position.

It is normal for the vendor’s business to be taken off the market during your due diligence investigations, and for any and all discussions with other potential buyers to cease. This is known as a period of exclusivity and the logic behind the seller granting it to the buyer is twofold. Firstly, a deal has been agreed in principle between the parties and, secondly, the buyer is now incurring costs to investigate the seller.

Accountants and solicitors are best placed to help you complete due diligence, although you can start the process off and obtain your own information using the Companies House WebCheck service.

At the end of the due diligence period, you should be able to form a clear view on the extent and nature (and impact on value) of any material risks in the seller. You can then assess what needs fixing, the associated costs to do this, and whether acquiring the business will add real value to your company. If you cannot tick all these boxes, you should walk away.

Day 2 – Buying a Business

CORPORATE FINANCE

Buying a Business: Approaching your target

In the second of a series of guides looking at how to buy a business, our Corporate Finance team offer tips and advice for approaching an acquisition target…

First impressions are crucial and the way you make your first approach will probably determine whether a fruitful dialogue ensues, or you are rebuffed.

Keep in mind that your interest in the target may well be totally unexpected from the point of view of its shareholders. Caught unawares, their instinctive reaction may be to turn down an approach if it is not handled carefully.  If possible, one idea might be to send your letter to their home rather than business address.

The success of a potential acquisition often hinges on the thoroughness of your preparation. You should evaluate the backgrounds and incentives of different shareholders so you can work out who is likely to be most receptive to your approach and why.

Timing is also crucial – approaching a business during its busiest period of the year may mean that the approach gets filed in the bin. So do be persistent and follow up any approaches if you receive no reply – but make sure that you don’t cross the line and be regarded as pestering them. This can be an extremely fine line.

Equally important is to determine who is the most suitable individual to represent your business. This could be your corporate finance adviser, a member of your board, or a trusted third party who is familiar with the target company’s shareholders.

Approaches are more likely to be well received if the strategic thinking behind the potential acquisition is explained in a businesslike but tactful way, focusing on synergies and benefits such as operational fit and cultural similarities.

Bite Sized Blog – SORP Module 2: Funds

NOT FOR PROFIT

FRS102 SORP does not deal with fund accounting, therefore SORP Module 2 deals with funds using current Charity Law. As a result, there is no difference to the treatment of funds if your charity is applying FRSSE SORP or FRS102 SORP.

There are no changes to funds under the new legislation. As a reminder, unrestricted funds are those given to the charity freely and allow discretion over their use. They can be earmarked at the discretion of the trustees – these earmarked funds are often called ‘designated funds’.

Restricted funds are where income is given and its purpose is restricted by the ‘donor’. This means that the charity can only use the money for the purposes given, unless permission is sought from the donor regarding an alternative use.

Income funds – it is important to note that where the restriction is met, e.g. in purchasing a fixed asset, the asset itself is not restricted  unless there is an ongoing restriction over the asset and its use.

Endowment funds – where this is created it can either be a permanent or expendable fund.

It is important that charities correctly classify their funds and have systems in place to readily determine income and expenditure throughout the year. Whilst the financial strength of a charity can be obtained from a quick view of the overall funds held by the charity, it should be noted that unrestricted funds are often key to the charity’s ongoing financial health.

Click here for our bite sized guide on charity funding.

For more information about the treatment of funds in the new SORP rules, please contact Simon Brown on 0191 285 0321 or email simon.brown@taitwalker.co.uk

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