Innovation: funding and tax. Start with the end game in mind

Featuring Richard Wadman | 17th August, 2017

Innovation, Innovation, Innovation

I have recently attended presentations from Cornwall Agri-Tech, Exeter University and Marine-I – the theme being to encourage innovation. Some of the presenting companies are administering grant schemes as well as offering business support.

We are also aware, and have blogged previously, that there may be potential increases in funding opportunities for clients from Innovate UK through the Industrial Strategy.

I can potentially see further funding for R&D becoming available to our clients via European Structural Investment Fund (ESIF) Calls – where I anticipate a number of the Calls currently open will lead to ‘delegated’ grant funding programmes being operated though the successful [intermediary] bidder to the Call.

Tax and funding

I have attended several presentations with one of PKF Francis Clark’s Tax Directors, Daniel Sladen. I anticipate Daniel may be asked to get involved in events and/or assignments with Marine-I and Cornwall Agri-Tech for example, such is the entwinement of innovation funding and tax.

Matters to consider:

  1. Be aware of the interaction of R&D tax credits and grants for R&D. The tax legislation has two R&D tax credit schemes in place; one of which has significantly greater tax reliefs than the other. As a general rule, it is unlikely that a company will get the enhanced relief for expenditure on a project which has been grant funded.
  2. Some tax reliefs (including R&D tax credits) are only available if the research is carried on through a limited company.
  3. There are tax reliefs for investors investing in new share capital – therefore a company structure will be required. This is important in the case of R&D as it is unlikely that a project will receive 100% grant funding for a project and that consequently match funding will be required. In the case of a newer company/start-up it may be that equity funding is the right option for that match, so the availability of tax reliefs to investors can be attractive. In addition, my experience shows that potential investors will want to see the ‘IP’ in the company vehicle into which they are investing.
  4. Patent box regime, which can see the profits of a company trading off patented IP tax at 10%, again requires the IP to be owned by a limited company.
  5. If the “IP” starts life outside of a limited company there will be a tax cost in transferring it into a limited company.
  6. There are also more general issues under the theme of ‘investment ready’ to consider in the context of seeking outside investment into a vehicle looking to secure funding for R&D, including: proof of market and route to market; company secretarial (who owns the shares and what rights do they have?) and compliance (tax and accounts). I have heard of one investment fall down due to the due diligence being unable to fully quantify who had been promised what (shares etc.) during the company’s formative years.

Funding concerns

Given the statements made by the British Venture Capital Association concerning the turning off the European Investment Fund (EIF) tap to new British commitments post the triggering of Article 50 – as reported in The Times recently – it was reported that the developments in Industrial Strategy, National Productivity Investment Fund and National Investment Fund have ramped up in terms of importance and immediacy. This may be the subject of a separate blog.

Conclusion

In summary, I expect the interaction between tax and funding to feature in presentations Daniel will be involved in over the coming months as the availability of grants for R&D increases. Regardless, I was reminded yesterday of the firm’s considerable expertise in assisting clients with R&D tax credit claims.

If you have any questions, please do not hesitate to get in touch with me, Daniel or your usual PKF Francis Clark contact.

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