R&D TAX CREDITS
R&D tax credits are a means of encouraging companies to innovate through a financial reward for developing new technologies to substantially improve products, processes, devices, materials and/or services.
Companies which are eligible for the tax incentives are extremely diverse. We have prepared claims not just for high technology companies in software, aerospace, defence, automotive etc., but also more 'traditional' manufacturing and engineering companies.
Who can claim?
All companies, large and small, can claim if they undertake qualifying work - even if they do not pay corporation tax because they are unprofitable.
There are two schemes under which a claim can be made.
1. Small and medium-sized businesses (SMEs)
The R&D tax credits available to smaller companies have substantially increased in recent years.
A super deduction of 230% of qualifying expenditure is applied for profitable companies (leading to a tax saving of around 25% of the expenditure, in addition to the ‘normal’ tax relief), while loss-making companies can claim a cash payment from HMRC of 33.35% of qualifying expenditure.
A company can generally claim under this scheme where they have:
less than 500 staff; and either
less than €100 million turnover; or
€86 million gross assets.
If a company meets the above criteria but their R&D is either funded (for example, by grants) or subcontracted to them by third parties, they will most likely need to make a claim under the R&D Expenditure Credits scheme (see below).
2. Research and Development Expenditure Credits (RDEC) scheme
RDEC allows larger companies, and SMEs in certain circumstances, to claim a cash credit against the cost of their qualifying R&D activity.
The credit is recognised in pre-tax profits in the company’s financial statements. From 1 January 2018, the credit rate increased to 12% (from 11%). As with the small scheme, loss-makers are able to claim cash back from HMRC, subject to certain conditions being met.
The RDEC credit is itself subject to corporation tax, so the net ‘post-tax’ cash benefit that it generates is around 10% of qualifying R&D expenditure.
Which costs qualify for R&D Tax Credits?
Certain costs incurred in undertaking eligible development work can qualify for enhanced tax relief and credits. These include:
Staffing costs and external workers – for time spent directly and indirectly on R&D.
Consumable items – including power and water costs, software used for R&D and consumable materials.
Certain payments to sub-contractors./Prototype costs.
A claim for R&D tax credits must be made within two/three years of the expenditure being incurred, depending on the date of the company’s accounting year-end.
FINANCIAL STATEMENT ANALYSIS
Get Your Accounting Done Right
At some point, most businesses require an in-depth look at their financial structure. An expansion project, low cash reserves or a jump in expenses can prompt you to conduct such an exercise. You might also opt to examine your financial structure if you find yourself borrowing more frequently as your sales increase, or if, for example, a customer wants to place a large order and is asking for longer-than-normal credit terms.
One way to analyse your financial health and identify how it might be improved is by looking closely at your financial ratios. Ratios are used to make comparisons between different aspects of a company's performance or how the company stacks up within a particular industry or region. They reveal very basic information such as whether you have accumulated too much debt, stockpiled too much inventory or are not collecting receivables fast enough.
A common use of financial ratios is when a lender determines the stability and health of your business by looking at your balance sheet. The balance sheet provides a portrait of what your company owns or is owed (assets) and what it owes (liabilities). Bankers will often make financial ratios a part of your business loan agreement. For instance, you may have to keep your equity above a certain percentage of your debt, or your current assets above a certain percentage of your current liabilities.
But ratios should not be evaluated only when visiting your banker. Ideally, you should review your ratios on a monthly basis to keep on top of changing trends in your company. Although there are different terms for different ratios, they fall into 4 basic categories.
Liquidity ratios
These measure the amount of liquidity (cash and easily converted assets) that you have to cover your debts, and provide a broad overview of your financial health.
The current ratio measures your company's ability to generate cash to meet your short-term financial commitments. Also called the working capital ratio, it is calculated by dividing your current assets—such as cash, inventory and receivables—by your current liabilities, such as line of credit balance, payables and current portion of long-term debts.
The quick ratio measures your ability to access cash quickly to support immediate demands. Also known as the acid test, the quick ratio divides current assets (excluding inventory) by current liabilities (excluding current portion of long-term debts). A ratio of 1.0 or greater is generally acceptable, but this can vary depending on your industry.
A comparatively low ratio can mean that your company might have difficulty meeting your obligations and may not be able to take advantage of opportunities that require quick cash. Paying off your liabilities can improve this ratio; you may want to delay purchases or consider long-term borrowing to repay short-term debt. You may also want to review your credit policies with clients and possibly adjust them to collect receivables more quickly.
A higher ratio may mean that your capital is being underutilised and could prompt you to invest more of your capital in projects that drive growth, such as innovation, product or service development, R&D or international marketing.
But what constitutes a healthy ratio varies from industry to industry. For example, a clothing store will have goods that quickly lose value because of changing fashion trends. Still, these goods are easily liquidated and have high turnover. As a result, small amounts of money continuously come in and go out, and in a worst-case scenario liquidation is relatively simple. This company could easily function with a current ratio close to 1.0.
On the other hand, an airplane manufacturer has high-value, non-perishable assets such as work-in-progress inventory, as well as extended receivable terms. Businesses like these need carefully planned payment terms with customers; the current ratio should be much higher to allow for coverage of short-term liabilities.
Efficiency ratios
Often measured over a 3- to 5-year period, these give additional insight into areas of your business such as collections, cash flow and operational results.
Inventory turnover looks at how long it takes for inventory to be sold and replaced during the year. It is calculated by dividing total purchases by average inventory in a given period. For most inventory-reliant companies, this can be a make-or-break factor for success. After all, the longer the inventory sits on your shelves, the more it costs.
Assessing your inventory turnover is important because gross profit is earned each time such turnover occurs. This ratio can enable you to see where you might improve your buying practices and inventory management. For example, you could analyse your purchasing patterns as well as your clients to determine ways to minimise the amount of inventory on hand. You might want to turn some of the obsolete inventory into cash by selling it off at a discount to specific clients. This ratio can also help you see if your levels are too low and you're missing out on sales opportunities.
Inventory to net working capital ratio can determine if you have too much of your working capital tied up in inventory. It is calculated by dividing inventory by total current assets. In general, the lower the ratio, the better. Improving this ratio will allow you to invest more working capital in growth-driven projects such as export development, R&D and marketing.
Evaluating inventory ratios depends a great deal on your industry and the quality of your inventory. Ask yourself: Are your goods seasonal (such as ski equipment), perishable (food) or prone to becoming obsolete (fashion)? Depending on the answer, these ratios will vary a great deal. Still, regardless of the industry, inventory ratios can you help you improve your business efficiency.
Average collection period looks at the average number of days customers take to pay for your products or services. It is calculated by dividing receivables by total sales and multiplying by 365. To improve how quickly you collect payments, you may want to establish clearer credit policies and set collection procedures. For example, to encourage your clients to pay on time, you can give them incentives or discounts. You should also compare your policies to those of your industry to ensure you remain competitive.
Profitability ratios
These ratios are used not only to evaluate the financial viability of your business, but are essential in comparing your business to others in your industry. You can also look for trends in your company by comparing the ratios over a certain number of years.
Net profit margin measures how much a company earns (usually after taxes) relative to its sales. A company with a higher profit margin than its competitor is usually more efficient, flexible and able to take on new opportunities.
Operating profit margin, also known as coverage ratio, measures earnings before interest and taxes. The results can be quite different from the net profit margin due to the impact of interest and tax expenses. By analysing this margin, you can better assess your ability to expand your business through additional debt or other investments.
Return on assets (ROA) ratio tells how well management is utilising the company's various resources (assets). It is calculated by dividing net profit (before taxes) by total assets. The number will vary widely across different industries. Capital-intensive industries such as railways will yield a low return on assets, since they need expensive infrastructure to do business. Service-based operations such as consulting firms will have a high ROA, as they require minimal hard assets to operate.
Return on equity (ROE) measures how well the business is doing in relation to the investment made by its shareholders. It tells the shareholders how much the company is earning for each of their invested dollars. It is calculated by dividing a company’s earnings after taxes (EAT) by the total shareholders’ equity, and multiplying the result by 100%.
A common analysis tool for profitability ratios is cross-sectional analysis, which compares ratios of several companies from the same industry. For instance, your business may have experienced a downturn in its net profit margin of 10% over the last 3 years, which may seem worrying. However, if your competitors have experienced an average downturn of 21%, your business is performing relatively well. Nonetheless, you will still need to analyse the underlying data to establish the cause of the downturn and create solutions for improvement.
Leverage ratios
These ratios provide an indication of the long-term solvency of a company and to what extent you are using long-term debt to support your business.
Debt-to-equity and debt-to-asset ratios are used by bankers to see how your assets are financed, whether it comes from creditors or your own investments, for example. In general, a bank will consider a lower ratio to be a good indicator of your ability to repay your debts or take on additional debt to support new opportunities.
Accessing and calculating ratios
To determine your ratios, you can use a variety of online tools such as BDC's ratio calculators, although your financial advisor, accountant and banker may already have the most currently used ratios on hand.
For a fee, industry-standard data is available from a variety of sources. Benchmarking Tool offers basic financial ratios by industry, based on Statistics small business profiles.
Interpreting your ratios
Ratios will vary from industry to industry and over time. Interpreting them requires knowledge of your business, your industry and the reasons for fluctuations. In this light, Bran Agencies offer sound advice, which can help you interpret and improve your financial performance.
Beyond the numbers
It's important to keep in mind that ratios are only one way to determine your financial performance. Beyond what industry a company is in, location can also be important. Regional differences in factors such as labor or shipping costs may also affect the result and the significance of a ratio. Sound financial analysis always entails closely examining the data used to establish the ratios as well as assessing the circumstances that generated the results.
FINANCIAL RESOURCE ALLOCATION
Around the Clock Attention
Tired of trying to keep track of all your taxes in an organised manner? With Bran Agencies, you can take the burden of handling finances off your shoulders! We’ve provided clients across the nation with extensive accounting services and I’m available around the clock for whatever you need.