Project R&D: A Post Corona Virus Action IP Checklist

With R&D tax credits delivering funding of between 25% and 33% of an R&D project’s cost, it is not surprising that the profile of this lucrative tax relief continues to grow.

It remains a key policy initiative for both the government and HM Treasury, and is here to stay – post Corona and post Brexit.

Innovation is at the heart of every company’s endeavor to develop and maintain their USPs – to give them a competitive edge.  As businesses look to exit lockdown and embrace whatever the ‘new normal’ is, there has never been a more important time for businesses to review their strategy for that innovation – and R&D tax credits are key to that.

So what actions can businesses be taking now to put their IP on the front foot post lockdown?  The following checklist might help.

1.    Data for later: maximise that claim

Scraping your systems and records for R&D data can feel like an unwieldy task, but it is crucial to maximising your claim.

Make sure your accountant is giving you all the support you need to help interrogate your systems, and assess what might be reasonable where the data isn’t giving you immediate answers.

Take some time out to review your data recording systems and processes – how might this be improved going forward – what can your accountant do to help?

2.    Review past claims

R&D claims have to be accompanied with supporting information, ideally presented in a formal report.  Your accountant should work one of these up for you, and ask you to review it before it is submitted.  Busy with the day job you might not have reviewed the reports in as much detail as you ordinarily would have liked to. It happens.

If this is you then it might be worth taking some time out to re-review previously submitted reports.  Were all the projects you have worked on included? Are there people in your organisation who directly or indirectly get involved with R&D whose cost has not been claimed for? Support staff and directors are often missed.

You have two years from the end of your accounting period to submit or resubmit claims – so you might be in time to claim additional costs if they were missed first time around.

3.    Capital Crimes – from Intangible Asset to Tangible Cash

You may have capitalised some of your innovation as an intangible fixed asset, strengthening the balance sheet and improving the profit and loss at the same time.

Did you know that R&D tax credit qualifying costs remain qualifying even if capitalised as an intangible fixed asset? Did you also know that they are eligible to be claimed immediately in the year the cost is incurred, not over time?  This point is often missed.

If you have capitalised your innovation, it might be worth checking you don’t have potential R&D costs locked up in your intangible fixed asset note, that can be quickly unlocked and claimed.

Conversely, if you are looking to capitalise your R&D spend to strengthen your balance sheet, then as the foregoing advice shows, you don’t need to do this at the cost of the R&D tax credit claim.  But be careful – DO NOT capitalise as a tangible fixed asset.  This will jeopardise the claim.

4.    Cash Now or Loss Later?

Your previous R&D claims may have given rise to tax losses and you decided to carry these forward as opposed to surrendering for the 14.5% credit.  Carrying forward is always more lucrative because that delivers a 19% benefit.

But with hindsight and the advent of Corona virus you might wish you had surrendered for cash now.  If this applies to you then you can resubmit your claim (subject to the two year time limit noted above) and generate a cash injection now – one that will deliver cash into your business within 28 days of submitting that tax return.

Alternatively you might have surrendered losses, but now realise you have profits that you could have sheltered at 19% - again, you can resubmit your return.  You would receive the benefit, less the credit already claimed, plus some interest.

5.    Manage grants and subsidies

You’ve been busy accessing all the government Corona virus support you can get your hands on – great news.  But as this is state aid it can compromise your R&D claim.  To prevent this, it is essential you keep records of what is claimed.  This is especially true for furloughed employees that would ordinarily be involved in R&D projects.

6.    IP strategy

Your R&D tax credit report should represent a comprehensive picture of your current and recent R&D activity.  It is thus a window on your current IP strategy.  What is it telling you? Is your R&D activity in line with your IP strategy? Is the report screaming that your projects are costing more than you thought, but no one has noticed the elephant in the room – or rather the R&D report?

If you are claiming R&D tax credits but don’t have a considered IP strategy, then now might be the time to reflect on what yours is, and should be.  From funding to patent protection, trademarks to licensing.  Is your strategy setting your innovation up for success, and maximizing its commercial value?

7.    Business Strategy

Far too many companies are failing to reach their potential, and typically this is down to a lack of proper business planning.  What is the strategy for your business? Are your innovations delivering USPs that are of little practical use, or highly valued but not being exploited by the right business strategy.

Could your R&D report and IP strategy review be the catalyst for a business planning review?

8.    Resourcing – Sub-contractors

Sub-contractor costs represent qualifying cost for R&D tax credits, albeit only 65% of the costs incurred are claimable.  Sub-contractors can be highly useful for developing innovation – they can be switched on and off much more easily than staff.

But, before you shed staff and switch to sub-contractors, remember this will have an impact on your R&D claim (losing you 35% of the equivalent sub-contractor cost).

If you would really rather prefer to hand on to staff but are struggling with the cost then now is a great time to be considering issuing staff with EMI share options.  Valuations will be much lower as a result of the Corona virus hence making it cheaper to get options to staff – a cost effective, cash free, incentive to retain your development team.

9.    Funding and Investment

With a handle on your strategy and the resource you need to take the business forward, now is a good time to be reforecasting the cash you will need to take the business forward and out of lockdown.  Has your working capital cycle extended? Will you need to access new markets to compensate for lost sales in other markets?

Did you know it is possible to raise funding secured on your IP?   The lending is based on the value of your historic R&D tax credit spend.  We can help you access this funding.

10.    Patent Box

Your innovation has delivered you a cashflow benefit through the R&D tax credit system, and now you are exploiting that IP commercially in the market.  The profits you are making could be benefitting from the Patent Box regime which reduces the corporation tax rate on qualifying profits from 19% to 10%.

11.    The Global Dimension

The evidence shows that companies that export are more likely to experience faster growth, deliver successful innovation and enjoy greater turnover and profits.  Now is a good time to explore what the international stage might have to offer.  From new markets, to accessing people and IP: technology is not bounded by borders – only your tenacity and initiative.

There is a lot of support available to business looking to ‘go global’ – from Bishop Fleming’s international team, through to HM Governments Department for International Trade.