Presentation by David Clift of Hazelwoods Solicitors, looking at how you can fund innovation in business.

1. www.hazlewoods.co.uk
Funding Innovation November 2010
David Clift
Tax Director
t: 01452 634800
e: david.clift@hazlewoods.co.uk

2. Sources of funding
• External investment
• Grants and other support
• R&D tax incentives

3. External investors – possible options
• Bank
• Business angels
• Venture capitalists

4. External investors
Bank debt:
• Usually cheaper than other external finance, but
currently difficult to obtain
• Asset backing, personal guarantees etc
• No ownership or control issues
• Servicing the debt – impact on profitability,
cashflow and prospect of other investment

5. External investors
Business angels:
• Wealthy individuals
• Usually invest in companies, not sole traders
• Typical investment level around £50,000
• As individuals:
– different attitudes to level of involvement in business
– different skills and experience
– ensure appropriate ‘fit’ with you and your business
• Angel Investment Networks – e.g. SWAIN

6. External investors
Venture capitalists:
• Varying investment criteria – seed funds, sectors etc
• Investment level usually at least £250k, commonly £1m +
• Typical exit 3 to 5 years
• Usually expensive finance
• Brings specialist skills in finance and industry
• Availability of further funding
• Often want large equity slice - Risk that you could
effectively become “an employee in your own company”

7. External investors
What they are interested in:
– Business plan, background etc
– What is unique / new about the offering?
– Is valuable IP protected?
– Management team
– Market analysis and competitors
– What will the business look like in 3 to 5 years’ time?
– GROOMING REQUIRED

8. Grants and other support
• Essentially forward-looking
• Often interested in a different ‘value add’
• Grant for R&D? – current status
• Other grant funding:
– Technology Strategy Board calls
– European funding e.g. Eurostars, FP7
– Specialist funders e.g. Wellcome Trust, Carbon Trust
• Knowledge Transfer Partnerships (‘KTP’)

9. Research and development
tax relief / credits
• Brief background
• The technical aspects
• Some practical considerations

10. What is R&D tax relief?
• Government “subsidy” for companies which:
- incur expenditure on qualifying R&D, or
- carry out qualifying R&D, or
- both
• Administered through the corporation tax self
assessment.

11. What is R&D tax relief?
Enhanced tax relief of
• 175% of qualifying expenditure under SME scheme
- Additional tax saving of usually 15p-16p for every £1 qualifying
R&D (at small companies rate)
- R&D tax losses can be ‘cashed in’ for a repayment of PAYE & NIC
up to 24½p for every £1 qualifying R&D.
• 130% of qualifying expenditure under large companies scheme
- Additional tax saving of usually around 8½p for every £1
qualifying R&D (assuming full rate)
- No option to ‘cash in’ losses

12. SME Scheme
• SME scheme is aimed at SME companies which
FUND their own qualifying R&D
• Expenditure must not be subsidised
• A SME is a company with
- Fewer than 500 employees AND:
- Annual turnover of Euro 100m or less; OR
- Total assets less than Euro 86m

13. Large companies scheme
• The large companies scheme is aimed at (ALL) companies
which CARRY OUT qualifying R&D
• Companies receiving government grants for a project can
claim under the large scheme (for entire project)
• Companies that receive funding from large companies can
claim under the large scheme for the funded parts of the
project (unfunded aspects under SME scheme)

14. Is it R&D?
In order to qualify for R&D tax relief a project must
 Represent an advance in science or
technology
- Extend overall knowledge
- Appreciable improvement
 Involve the resolution of scientific or
technological uncertainty
(NB: significance of patents)

15. Qualifying costs
• Expenditure has to be revenue in
nature and be at least £10,000 per
year
• Staffing costs and external workers
• Software
• Consumable items
• Certain payments to sub-contractors
(usually only under SME scheme)

16. What is R&D in practice?
• A project
• “Appreciable improvement”
• “Technological uncertainty”
• “Competent professional” benchmark

17. What is R&D in practice?
• In essence, 2 questions:
- How is your
product/process/material/device/service
better than others?
- Did you have to work through some fairly
complex technical issues?

18. Common misconceptions
“We can’t claim because…
• …Our business is not high technology”
 New design of luxury golf equipment
 Animal shearing equipment
• …We don’t pay Corporation Tax”
 Loss making dental instrument designer
• …We don’t make a product”
 Dental burr manufacturer – new production/manufacturing processes
 Rail industry: lean line manufacturing

19. Common misconceptions
“We can’t claim because…
• …Our R&D was unsuccessful”
• …The R&D that we do is all paid for / funded”
 Consulting Engineers – successful claim for fully funded work
• …We capitalise the costs of our R&D in our
accounts”
 Manufacturer of specialist part for wind turbines: R&D claim turned taxable
profits into tax losses and gave rise to substantial tax credits

20. Why should you consider a claim?
• Potential cash injection with ‘no strings’ on how to spend it
• Effectively a source of funding with no impact on business
ownership or control
• Attractive for potential investors:
• Indicative of innovative business
• Reduced net cost of development work
• Demonstrates good financial management and awareness
• Paperwork not unduly onerous compared to other funding

21. What to do?
• Talk it through
• Involve HMRC? (no advance clearance)
• Estimate ‘ball park’ claim
• Prepare claim
 Full report?
 A few pages?
• File claim
 tax repayment can be within 28 days

22. • Chancellor’s Autumn Statement on 29 November 2010 - Consultation on improvements to taxation of IP
and R&D incentives
• Proposals re R&D tax incentives:
– Do NOT intend to restrict to specific sectors (despite Dyson report recommendations)
– Views sought as to improvements to impact or delivery, & making claim easier
– Potential inclusion of further qualifying cost categories / limiting existing qualifying costs
– Possible exclusion of development of software for internal use
• Proposals re taxation of IP:
– Introduction of ‘Patent Box’ regime from 1 April 2013 – special 10% tax rate on profits from patents
– To apply to patents only, not other forms of IP
– For patents first commercialised after 29 November 2010
– To apply to both royalty profits and ‘embedded’ income i.e. effectively value of patent reflected in
price of patented products
What does the future hold?

23. Contact
David Clift
Tax Director
t: 01452 634800
e: david.clift@hazlewoods.co.uk
Hazlewoods LLP
Windsor House
Barnett Way
Barnwood
Gloucester
GL4 3RT
www.hazlewoods.co.uk