TM Finance Supplement 2013 by Optic Juice

FINANCE Making the most of manufacturing tax breaks

FINANCE 2013

What’s in this report? P6 Investment incentive:

The temporary increase to the Annual Investment Allowance represents a rare window of opportunity to gain quicker returns on investments in plant and machinery. Ian Isaac, managing director, Lombard Business & Commercial explains the rules but warns that the clock is ticking.

P6 A fresh look at funding

Manufacturing companies are riddled with opportunities to benefit from R&D tax credits, cash which can be used to fund investment or working capital. But too often, misconceptions about the nature of R&D mean these opportunities go unclaimed says industry tax specialist, Jumpstart.

P6 How to

A clear five step guide to making an optimised R&D tax credit claim. Barrie Dowset, CEO of Myriad Associates clarifies what is expected of companies and demystifies the HMRC approval process.

P6 Playing the system

0f 150,000 SMEs eligible to benefit from R&D tax credits, 93% are missing out says Mark Evans, MD of SME focused R&D Tax Claims. It’s time to wake up to increasing opportunities to benefit from the UK tax system, including the newly launched Patent Box.

P6 UK government Innovation incentives: an update

Leyton outlines recent and future changes to R&D tax structures and the Patent Box.

Editorial

This report was compiled for The Manufacturer magazine by: Jane Gray, Editor j.gray@sayonemedia.com

Design

Martin Mitchell, Art Editor martin@opticjuice.co.uk

Sales

Henry Anson, Sales Director h.anson@sayonemedia.com Joe Green, Sales Executive j.green@sayonemedia.com In order to receive your copy of thec The Manufacturer kindly email p.kealy@sayonemedia.com, telephone 0207 4016033 or write to the address below. SayOne Media cannot accept responsibilty for omissions or errors. Terms and Conditions Please note that points of view expressed in articles by contributing writers and in advertisements included in this journal do not necessarily represent those of the publishers. Whilst every effort is made to ensure the accuracy of the information contained in the journal, no legal responsibility will be accepted by the publishers for loss arising from use of information published. All rights reserved. No part of this publication may be reproduced or stored in a retrieval system or transmitted in any form or by any means without prior written consent of the publishers.

INTRODUCTION We can help companies grow and succeed by building infrastructure, backing local enterprise and supporting successful sectors. But nothing beats having the most competitive business tax system of any major economy in the world. That is what this government set out to achieve. That is what we’re delivering.

his was Chancellor George Osborne’s confident statement to the nation in March as he delivered his 2013 Budget. Mr Osborne’s address tried hard to please everyone. He talked of tax initiatives to help small companies grow, by providing a National Insurance break for instance, while also assuring large, global firms that he could make it worth their while to invest in the UK – reducing corporation tax to 21% with a view to making it 20% by April 2015 was central to this. He promised reliefs for specific industries and technologies – from those in creative sectors such as television and animation, through to low carbon vehicle production and shale gas exploitation. And he spoke of exemptions for high energy users from the Climate Change Levy. But for manufacturers reviewing the Budget, the focus was on two key announcements. The move to increase the rate of “above the line” R&D tax credits to 10%, and the introduction of a temporarily enhanced £250,000 Annual Investment Allowance. Such measures were welcomed by many as a sign that government is creeping toward an understanding of the UK’s industrial needs. Acknowledging that, in order to rebalance, a lot of catch up investment needs to be made in Britain’s industrial supply chain to offset years of declining confidence and off shoring. But this was the response of the publically and politically engaged. What is the awareness of the wider manufacturing and engineering community of these measures? How easy is it for them to familiarise themselves with the associated qualifying rights and take advantage? According to manufacturing trade body EEF, there is significant disparity between the opportunity for industry to benefit from UK tax breaks, and the amounts being claimed. The manufacturing sector conducts 72% of all research and development taking place in the UK today says EEF. And yet only 40% of R&D tax credit claims come from manufacturing companies. SMEs seem to be the main segment missing out with Mark Evans of tax specialist R&D Tax Claims reporting that of 150,000 SMEs eligible to claim for R&D relief in the UK, 93% do not do so. Lack of awareness, and a fear of having insufficient time and resources to optimise a claim are the most common reasons for an under-utilised tax infrastructure according to a recent survey of EEF members. In this brief report, finance and tax professionals set out to deconstruct those barriers, opening the way for a clearer understanding of who can benefit from tax schemes targeted at manufacturing and how to manage the claim process. END

Winner of ‘Best Leasing & Asset Finance Provider’ at the Business Moneyfacts® Awards for 5 consecutive years.

FINANCE 2013 Lombard

lombard.co.uk Lines are open 9am to 5pm Monday to Friday. Lombard North Central PLC. Registered Office: 3 Princess Way, Redhill, Surrey RH1 1NP. Registered in England No. 337004.

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12/04/2013 10:47

Investment a

s we move into the second quarter of 2013, there are some mixed reports relating to signs of recovery. However, one factor that remains certain is the important role that investment has to play in unlocking growth. In December 2012, the Chancellor announced in his Autumn Statement that the maximum AIA limit will be temporarily increased from £25,000 to £250,000 with effect from 1 January 2013 for a period of two years. This means that any qualifying capital equipment purchased before 01 January 2015 will receive a 100% deduction against taxable profits up to a maximum of £250,000. The good news here is that following this temporary increase in the Annual Investment Allowance (AIA) now is a good time to bring forward business investment plans to acquire the plant and machinery needed to secure businesses’ future. The objective behind this temporary increase is to stimulate much needed growth in manufacturing and other industries, as well as help suppliers and manufacturers by increasing their order books, and thus benefiting the economy as a whole. In terms of asset finance, the increased AIA means that if a business is considering using hire purchase to acquire new plant and machinery, the tax savings in year one of a contract could pay for the first year’s rental payments.

The temporary increase to the Annual Investment Allowance provides the perfect opportunity for manufacturers to invest says Ian Isaac, managing director, Lombard Business & Commercial

However, it must be recognised that as this is a time-limited incentive, it is important that manufacturers familiarise themselves with the benefits that the enhanced allowances can offer them and if they have ongoing investment requirements, they may want to plan their acquisitions accordingly in order to gain maximum benefit. In addition, it is important to note that the Government may revert to the lower £25,000 level on 01 January 2015. It is also important to consider the acquisition lead times on some capital equipment, particularly specialist kit where an order may take many months to fulfil. The clock is ticking and as it stands there are only 20 months remaining. An awareness of this timing and the impact of having a non December accounting year end is essential if manufacturers want to ensure that they don’t miss out on the maximum AIA that they are able to claim whilst the increased allowances are available. Since the recession, it is understandable that many business owners may have delayed making capital investments. This may have been due to either a lack of confidence in the economy or a decision to

FINANCE 2013 Lombard

preserve cash. Regardless of the reason, the increased allowance is an ideal reason not to delay investment decisions any longer. At Lombard we’ve worn a deeply furrowed argument that continued capital investment is fundamental to the future of UK manufacturing and that the sweating of assets has a detrimental impact on a business’ efficiency and output. This is supported by a recent customer survey carried out by Lombard which showed a quarter of the businesses surveyed acknowledged that they were operating with equipment that needs replacing, and of those nearly three-quarters said they were paying higher maintenance bills as a result. In addition, 65% reported that they had lost orders with a potential value of more than £2.4bn as a direct result of not investing in new equipment. At Lombard we certainly hope that the temporary increase in AIA will turn this around and that investment levels will increase as a direct result. However in order for this to happen it is important that manufacturers understand the significant benefit that is available to them and we would urge them to speak to their business advisers about how to take advantage of this time-limited offer. We are working closely with our customers to help them gain maximum advantage of the increased allowance. AIA can be claimed where there is a hire purchase (HP) arrangement in place with intent of ownership. It is not necessary to have paid in full for the plant and machinery to claim the AIA. The allowance is given as though it was an outright purchase and ownership is deemed to have taken effect from the beginning, even though the rentals are payable over the term of the HP agreement. The allowance does not however apply to leases where the equipment is owned by the leasing company and not the manufacturer. The AIA is certainly also available if you buy the equipment yourself, although hire purchase carries other advantages which should be considered. Over the past couple of years, we have seen more businesses turning to

Customer story A manufacturer in the automotive sector based in the West Midlands had a requirement for a significant piece of machinery and approached Lombard for funding to the value of £600,000. Having looked at the figures, as the customer had utilised his AIA limit for 2012 he chose to delay the purchase until May 2013 in order to take advantage of the increased allowance. As a result of deferring the purchase, it is estimated that over the length of the term, the customer will be able to offset £470,000 against tax, providing his company stays in profit. Lombard has developed a guide to help businesses understand these changes. For more information, or download a copy of this guide, please log on to www.lombard.co.uk. Security may be required and product fees apply.

asset finance to help them capitalise in the post-recession period. We have found that an increasing number of businesses have been proactively seeking out sources of finance beyond that of traditional means of funding in order to help fulfil their capital investment needs, and asset finance is helping to achieve this. Significantly, the asset finance sector has seen positive year on year growth and new figures from the Finance & Leasing Association (FLA) indicates that asset finance funded nearly 30% of fixed capital investment in 2012, a figure that is expected to grow by another 10% in 2013. We believe that this growth can be attributed to businesses realising the many benefits of asset finance. Customers find it a flexible source of finance where the security is in the asset. It is also a committed source of finance that allows businesses to retain their working capital. In addition, using asset finance can be more flexible because these solutions can be tailored to the life of the asset or the period that it is required. It allows for budgeting with greater certainty and avoids the unusually high peaks in spending that capital expenditure can otherwise bring to cash flow. It also helps minimise the risks and the higher costs of making capital purchases. By linking asset finance with the increased AIA there is a compelling reason for businesses to take the step towards investing in their future. So we urge you to seriously consider the availability of this increase in AIA to help you support the capital investment that will help secure your competitiveness and growth aspirations. END

If a business is considering using hire purchase to acquire new plant and machinery, the tax savings in year one of a contract will pay for the first year’s rental payments. Ian Isaac, managing director,

Lombard Business & Commercial

A fresh look at

funding Looking for a cash injection to aid your expansion plans or ease your cashflow? The answer could be a lot closer than you think – within your own business in fact. The trick is to look beyond the obvious.

Almost every manufacturing operation is involved in some kind of R&D – be it prototyping, development or experimentation with materials or physical production processes – that entitles them to tax benefits. And the more R&D activity you’re involved in, the more you stand to benefit from the Government’s generous but massively under-utilised R&D tax credit scheme. Specifically designed to stimulate e’ve all heard the one about the fresh-faced apprentice who is sent by his journeyman to the (and reward) innovative activity in UK stores for a ‘long stand’ and then told to ask the manufacturing and technology, the R&D tax credit scheme is also one of the best foreman for a ‘big weight (wait)’. The put upon apprentice takes the request at face value, without really ways of unearthing hidden cash reserves within your own company which you’re thinking, much to their subsequent embarrassment. legally entitled to. But the apprentice’s callow interpretation of their And we’re not just talking about a instructions in the above scenario is not dissimilar to few pounds and pence. According to the attitude of some experienced businesses when it Jumpstart, the UK’s leading R&D tax comes to research & development. credit specialist, eligible companies Many take a traditional and literal interpretation of R&D can typically look forward to recovering which confines it to test tubes, men in white coats and dedicated laboratories. But this is far from the whole truth. £150,000 of tax relief within the first

18 months of talking to them. All on a no-win, no-fee basis. First though, you have to unearth those lucrative nuggets of R&D activity.

Finding R&D activities within your manufacturing processes is like a treasure hunt which turns up wedges of cold hard cash in every part of your process. Every time you change the shape of something from one state to another, for example, or have to assemble two pieces of technology, there could be a technical

Identifying R&D in your company

FINANCE 2013 Jumpstart

The travesty is that “over 90% of businesses either don’t claim at all or don’t claim enough,” according to Brian Williamson, managing director at Jumpstart, a specialist industry tax consultancy. Scottish-based Clyde Blowers Capital, the name behind Clyde Union and David Brown Gears among others, is one of the 10% or so of enterprises taking full advantage of the scheme. Jim McColl OBE, chief executive and chairman of Clyde Blowers Capital says “If everyone made use of the services of Jumpstart, then the UK economy and the Scottish economy in particular, with its long history of innovation, would be so much healthier. There is an estimated £980 million unclaimed out there and I urge all to follow us, and get what is, after all, rightfully theirs. It’s about economic impact and it is in our hands.”

Brian Williamson, Managing Director, Jumpstart

Jim’s last point – about it being in industry’s hands to make a difference – is a telling and important one. Consider for a moment how hard you work to maintain output, keep within budget and get product out the door, right first time and on time. Now imagine if you could still do all that AND reduce your costs by 25%, because that’s effectively what we’re talking about. On average, manufacturing companies can recover up to a whopping 25% of their costs, and often in cash. Surely, it’s everyone’s responsibility to find this hidden finance and get the reward that the manufacturers of the UK deserve. Jumpstart certainly thinks so. 100% focused on helping companies make successful claims, it saved over £20 million for its clients in 2012 alone. But hold on a minute… doesn’t the very mention of ‘tax’ have you picking up the phone to your accountant? Well no, not if you’ve understood any of what’s gone before. Accountants may be the ‘obvious’ choice, but evidence shows that they’re not the right one. Why? Because R&D tax relief (as opposed to any other kind) is first and foremost a technical area, requiring a special combination of skills. Recruited

Could there be hidden cash just waiting to be discovered in your business?

Taking advantage

Manufacturing companies are missing out on millions of pounds in tax relief that’s rightfully theirs. Over 90% of businesses either don’t claim at all or don’t claim enough.

Call Zoë Longford on 0131 240 2900 or go to www.jumpstartuk.co.uk for more information

challenge to overcome. Frustrating though these technical challenges may be, if by resolving them you create a new and more efficient way of doing what you do, then chances are, you’re entitled to tax relief on the costs involved. Eligible companies can deduct up to 225% of qualifying expenditure when calculating their profit for tax purposes. What’s more, they can claim R&D tax relief on expenditure that’s up to three years old.

for their technical expertise and promoted through the Jumpstart Academy, Jumpstart’s analysts are the ultimate hybrid – highly qualified technical experts who also understand the complex R&D tax credit legislation inside out. And it shows! Take James Milne CBE, chairman and managing director of privately-owned manufacturing company, Balmoral Group. Given the nature of the business, James had been extremely disappointed by an R&D tax credit award they had received through its accountant. So he turned to the experts. “I don’t know an accountant who can visit our plants and identify such R&D detail. With the technical expertise of Jumpstart we saw a massive increase in the money returned for the R&D we had invested in,” says Mr Milne. “Now that we have seen what HMRC considers eligible expenditure, I hope our future claims with Jumpstart will be every bit as strong.” Clyde Space’s Craig Clark has a similar story to tell. The founder and chief executive says “Although we were clearly doing R&D we were being advised by people who didn’t understand the company and didn’t understand the potential. After working with the consultants at Jumpstart we recovered more than £60,000 from HMRC.” Right now, you might well be the apprentice when it comes to claiming your just rewards under the R&D tax credit scheme, but that’s no reason to have a long stand or a big wait for your benefit. Call Jumpstart today. It costs nothing to find out and you’ve everything to gain. END

FINANCE 2013 Myriad Associates

Barrie Dowsett, CEO of R&D Tax Credit specialists Myriad Associates, has designed a five-step guide, to help deliver an optimised R&D tax credit claim. However, he does not recommend undertaking the journey alone – working with an R&D tax specialist will ensure a claim is maximised while also minimising the time a company must spend on it. Step 1 – The Brainstorming Session Invite your key technical experts, finance and a representative from an R&D tax specialist to a brainstorming session that focuses on identifying all eligible development projects undertaken in the accounting period(s) for which you are claiming. For each project, you will need to establish the start and finish date (if it has finished!) Barrie Dowsett has more than 10 years of experience in claiming R&D tax credits. Contact him on: T: 01858 414 249 E: bjd@myriadassociates.com To make free use of Myriad’s online R&D Tax Credit calculator, visit its website at www.myriadassociates.com

HOWTO make an optimised R&D Tax Credit claim Step 2 – The Technical Write-Up HMRC highly recommends that you include a technical briefing for your major projects when filing an R&D tax relief claim. We suggest that technical briefings are completed to cover approximately 60% of your development costs. Therefore it makes sense to prepare a technical briefing for projects that are high on the development time front. It is important that the technical briefing focuses on highlighting the eligible activities within BIS guidelines. We strongly recommend that the technical briefing is drafted by an R&D tax relief expert to ensure that the claim meets the qualification criteria.

Step 3 – The Costing Schedule The R&D tax credit claim will need to be supported by a costing schedule that allocates eligible costs to each qualifying development project. Again, the use of specialist R&D tax relief experts will ensure that this costing schedule is correctly prepared and that your claim optimised. You can claim the following ‘revenue’ expenditure which is actively and directly related to the eligible development projects: Cost of employing staff; Paying a staff provider (agency) for staff provided to the Company; Software costs directly relating to eligible development projects; Sub-contract costs (65% of invoiced value); Apportionment of power, water and fuel as well as certain consumable costs.

Step 4 – Submitting Your Claim A full R&D tax relief claim will need to be prepared including technical briefings and costing schedules. You will need to update the company tax return (CT600) and tax computations, something which can be completed by your R&D tax specialist or accountants. If you are making a retrospective claim then the company tax return (CT600) and tax computations will need to be amended and resubmitted together with the R&D tax relief claim. The R&D tax relief claim, together with the company tax return, tax computations and the statutory accounts will be reviewed by one of the 7 regional HMRC R&D Tax Units.

Step 5 – HMRC: Reviewing and Processing Your Claim The relevant HMRC R&D Tax Unit will process your R&D tax relief claim by reviewing your technical briefings, checking your costing schedule and company tax return/tax computations. If the company is due a corporation tax refund or a credit payable then the payment is normally made within 1 to 2 weeks once the claim has been processed. If HMRC decide to make an enquiry into the R&D tax relief claim, this is normally communicated within 30 days of receiving the claim. However, HMRC does have up to 12 months to make to make an enquiry into a company tax return. END

FINANCE 2013 R&D Tax Claims

Playing the system

Mark Evans, Managing Director of Wolverhamptonbased tax specialists R&D Tax Claims Ltd, has a 100% success rate and has helped SMEs reclaim over £10 million in R&D tax Here’s what he has to say about the incentives and benefits of keeping on top of the system.

s UK output increases and manufacturing slowly recovers a foothold, increasing numbers of UK manufacturers are reporting enquiries from customers who had previously outsourced to the BRIC nations. The most competitive are those that have spent time and resources developing their products, processes and services to offer innovative as well as cost competitive packages to customers who require agility in their suppliers. The recent Budget went some way to acknowledge the vital part that manufacturers are playing in the economic recovery and to support them in growing these important competitive characteristics. UK SME manufacturers are now well-placed to invest in research and development which will help them win more business, both at home and abroad, secure in the knowledge that a system of tax breaks will support their endeavours. Foremost among such incentives for innovation are R&D tax breaks and a new scheme, The Patent Box. The R&D tax credit scheme offers SMEs investing in R&D the opportunity to claim back extra corporation tax relief on every pound the business spends in developing new products or introducing new and improved processes. The enhancement of R&D expenditure stands at 125%. It’s good to see the Government championing manufacturing, but there are still many business owners who are unaware of the R&D reclaim scheme and sometimes company accountants are wary of the scheme, believing that the reclaim process is time consuming and therefore costly. Outsourcing this to

a professional R&D tax credit company therefore makes sound economic sense. Every year, over £5 billion worth of potential tax relief sits unclaimed by UK companies. Around 150,000 eligible UK SMEs could benefit from the scheme but less than 10,000 make a claim. That means over 93% are missing out because they’re not aware that they qualify. Manufacturing can encompass engineering, electronics, pharmaceutical, bio-tech and communication systems, as well as more traditional methods. The scheme also applies to the exploration of new products or niche markets. A good tax specialist will undertake all of the investigative work and should be able to present HMRC with a fully researched and documented case for reclaim. HMRC is fully supportive of the scheme and, as long as the tax specialist has done the groundwork, will refund money very quickly – a turnaround of three weeks is not unknown and a company can then continue to claim

annual reductions on future corporation tax bills. An R&D tax specialist should be happy to work with a company’s existing accountants and should always work on a no win, no fee basis.

Opening the Patent Box The Patent Box scheme was launched by the Government on April 1 this year. It enables companies to apply a lower rate of corporation tax to profits earned from its patented inventions. Patents are used in a range of sectors and the scheme is designed to encourage companies to locate high-value jobs associated with the development, manufacture and exploitation of patents here in the UK. It aims to make the UK tax system more competitive for hightech companies obtaining profits from patents. The scheme will be phased in over the next five years and will ultimately give businesses a reduced corporation tax of 10% on profits on intellectual property. The company must own or exclusively license-in the patents to benefit and must have undertaken qualifying development on them. Revenues from worldwide royalties, licence fees and sales of products incorporating patent technology will be allowable with in the scheme. END

If you are interested to see how it could help your firm call T: 01902 783172 or email: enquiries@rdtaxclaims.co.uk. For more information go to: www.rdtaxclaims.co.uk

FINANCE 2013 Leyton

anupdate UK government Innovation incentives:

Finance Bill 2013

How Leyton can help

eorge Osborne announced the Finance Bill 2013 on March 20 emphasising the long term objective of making the UK the most competitive tax system in the G20. UK industry has been provided with several incentives to enhance its competitiveness. The R&D incentive for companies now includes the above the line tax credit (ATL), for large companies, and Patent Box for all companies. The R&D SME scheme remains unchanged since the Finance Act 2012.

ATL

he ATL tax credit is an extension of the existing R&D tax relief scheme for large companies. As of April 1 2013, UK qualifying companies under the large company scheme are able to benefit from cash incentives even when they are loss making. This new scheme is designed to attract R&D innovation to the UK through international investment, while offering clearer budgetary responsibility to the R&D departments of large corporations. Qualifying companies will typically benefit from a tax credit of 10% (before tax) of R&D expenditure. This effectively offers companies a return on investment of over 7% post tax. While companies can still claim R&D tax relief under the Large Company Scheme up to March 31 2016, they can elect to opt into ATL from April 1 2013. Although expertly identifying qualifying activities visĂ -vis costs is still necessary, group tax position and accounting impact needs to be considered before deciding which option to choose.

Patent Box

he Patent Box is an income based tax incentive introduced to support innovation. The mechanism provides preferential tax treatment to profits derived from sales related to qualifying intellectual property (IP) held by a company. This serves as an effective supplementary support to businessesâ&#x20AC;&#x2122; R&D investment by encouraging commercialisation of innovative ideas. It will effectively allow qualifying companies to apply a 10% rate of corporation tax to all profits relating to qualifying IP. The full scale of the new incentive will be phased in over a five year period. Sixty per cent of the benefit was introduced on April 1 2013, increasing by 10% per tax year until April 2017, at which point the full benefit of the reduced 10% rate will be in effect. For many companies, the legislation for the new regime is fairly complex and requires careful planning in a number of areas such as the timing of electing into the Patent Box and potential transfer pricing implications.

his innovation incentive update was provided by R&D tax consultancy, Leyton. Drawing on extensive knowledge of the UK manufacturing sector, Leyton offers to maximise the combined benefits of the R&D claim and Patent Box regime for UK-based manufacturing operations, ensuring companies gain appropriate relief on all R&D activities and pay less tax on patent related profits. Specific services include: Preparation of necessary supporting documentation using in-house engineering and tax expertise A preparation and filing fast track for low cost, patent protection applications Modelling of potential Patent Box beneďŹ ts based on your business and transactional specifics Management of Transfer Pricing concerns, where relevant Acting as intermediary with HMRC should there be an enquiry about the claim, with a free defence for R&D claims Please contact us on 0207 043 2300 for further information or visit www.leyton.com/uk

www.leyton.com/uk

ARE YOU OPTIMISING THE FULL FINANCIAL VALUE OF YOUR INNOVATION SPEND? Do you maximise the impact of your R&D Tax Relief? Are you aware of the grants available? Have you elected into the Patent Box?

Realise the full potential of your innovation, research and development Leyton, your partner in optimising the R&D Tax Relief, Grant funding and Patent Box