Sourcing Business Finance – exploring your options as interest rises

Most businesses rely on funding in one form or another to keep their operations running, invest in new equipment or projects, and grow.

The past few years in particular have made it necessary for many businesses to source extra funds, either for dealing with the impacts of the pandemic or the rising cost of supplies.

According to UK Finance, SMEs borrowed a total of £22.6 billion in 2021, with demand for finance stabilising towards the end of the year.

But as interest rates rise, so does the cost of debt, and that’s putting additional pressure on businesses across the UK. As loans become more expensive, you might be wondering about your other options when it comes to financing.

Debt vs Equity

You don’t have to choose between debt and equity finance – in most cases, businesses use a combination of the two. But it’s important to know the pros and cons, so you can make sure you’ve got the right mix.

Put simply, debt finance means you’re borrowing the money and will need to pay it back, usually with interest. Equity, meanwhile, means you’re selling a stake in your business to an investor – so they won’t expect you to pay the money back.

Because of this, getting finance through investment means you avoid the problem of rising interest rates altogether. But it does mean you’re giving up a portion of your business – and its profits – to someone else.

Your investor will expect to receive a return on their investment, and they’ll want reassurance you can provide it. This will generally mean you have more reporting obligations to show shareholders your progress, and they may want to influence your business decisions.

Having multiple owners can make processes like selling or closing the business more complicated when you eventually want to leave, so it’s always important to make sure you set up and understand the right formal agreements with them from the outset.

With a loan, meanwhile, you maintain a greater degree of independence from the lender, and full control over your company. Your only obligation is to repay the loan, but once that’s done in full, the lender won’t have any involvement in your business.

That said, having an experienced investor on board can also be an advantage, giving you access to their business knowledge and networks.

Types of Debt Finance

A common form of debt finance is a term loan. This is a loan you receive as a lump sum, that must be repaid over a set period of time. These can be long or short term, and may be secured (meaning you offer a valuable asset your business owns as collateral, in case you can’t repay it) or unsecured.

The interest might be fixed over the period of the loan, or variable, so it’ll change over time depending on the bank’s borrowing costs or the Bank of England base rate.

For shorter term financing needs, you might use a credit card, an overdraft, or another line of credit you can access as and when you need to. You’ll only pay interest on the amount you borrow with these, although there can be fees involved and you’ll pay extra if you miss your repayment date or go over your credit limit.

Besides these two traditional loan options, there are various alternatives to explore, too. Peer to peer lending websites, for example, allow people to lend and borrow money through a marketplace style set up. These can, in some cases, be easier to access than a traditional loan, but they can also come with higher fees and interest rates.

It’s also worth looking into whether any Government loans are available to you. During the pandemic, thousands of businesses accessed emergency relief such as bounce back loans and the coronavirus business interruption loan scheme, and while these are both closed, you can still apply for the recovery loan scheme until 30 June 2022.

Types of Equity Finance

If you decide to go down the equity finance route, one option is to seek funding from an angel investor. These are individuals who invest in your business because they can see an opportunity in it – perhaps they have a particular interest in your sector, or in what you’re trying to do.

For later stage funding, venture capitalist (VC) investors are another option. These are professional investors who’ll want to see a substantial return on their investment, and generally want to be more involved in your business because of this.

VCs will sometimes be incentivised to invest through Government tax relief schemes, including the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), or Venture Capital Trusts (VCT).

Equity crowdfunding is another option if you can get enough people interested in what you’re trying to do, allowing you to offer unlisted shares in your business to multiple members of the public. This is often more relevant for consumer products than it is for business to business ones.

For certain businesses, particularly within the tech sector, you can also look at development schemes such as incubators and accelerators. These programmes offer investment, but they can also provide resources, mentorship and access to networks.

Finally, a common option for new businesses is to get some initial investment from friends and family. The people closest to you might be the most willing to help you succeed, and to put their money towards your goals – but make sure both sides are clear on what they’re getting into.

Other Types of Finance

Besides loans and investment, there are some other options to consider when accessing finance for your business.

Government grant schemes may be able to provide support, depending on your location, sector, and business activities. You can find a list of the schemes available on the Government website.

It’s also important to consider how you might be able to save money within your business, either by reviewing and streamlining your costs, or by making the most of the tax relief and allowances available to you.

Tax reliefs are available for Research and Development projects, for example, or for specific sectors like the creative industries.

You might be surprised by how much you can save by using these and cutting down on your tax bill – so be sure to find out exactly what you can access before making any financing decisions.

Talk to Charles Lucas about obtaining finance for your business on 0161 703 8353.

Research and Development – the tax benefit for innovative companies

The lowdown on this relief for innovation.

Research and development (R&D) tax credits were once a little known tax incentive for companies which invested in innovation. But after rule changes in recent years, and a push by many Tax Advisers, they are now much more widely understood and used.

They may no longer be much of a secret, but they are still a remarkably effective way for innovative companies to get something extra back from the tax system. Here’s a look at how they work, what the benefits are and what the future might hold for R&D tax credits.

There are two R&D tax credit schemes – nominally, one for smaller companies called the SME scheme, and one for larger companies called RDEC (that’s short for research and development expenditure credit).

Actually, RDEC can also be of use as a fallback option to smaller companies that do not qualify for the SME scheme on a technicality.

The SME Scheme

The definition of an SME in R&D terms may surprise you. It is a company with fewer than 500 employees, and either less than €86 million in gross assets or €100m in turnover.

As you can imagine, by this standard, most companies in the UK are SMEs. And the good news is that the SME scheme is more generous than RDEC.

If you make a profit, it allows you to claim back on average an extra 25p in the pound for qualifying R&D expenditure, and potentially as much as 33p in the pound if you are loss making.

So if you spent £20,000 on qualifying R&D, that would equate to a £5,000 R&D tax credit benefit if you were in profit and a £6,600 benefit if you made losses. Very handy for cash flow and reinvestment in the business – and average SME claims are actually much higher. In 2018/19 the average was worth £57,228.

You may be able to hire a new technical expert to help with future R&D or invest in new equipment with this windfall.

RDEC

If you employ more than 500 people, and either have more than €86m in gross assets or €100m in turnover, then RDEC is for you.

RDEC provides a flat rate benefit of 13% for qualifying expenditure, regardless of whether you make a profit or a loss. Because it is primarily for larger companies, the expenditure (and therefore the cash sums involved) tend to be bigger.

So if you spent £1m on qualifying R&D, you would be able to claim back £130,000. In 2018/19 the average RDEC claim was worth £632,931.

How Does My Company Qualify for R&D Tax Credits?

You have to be a limited company, and you have to be spending money on research and development. This is because the benefit is administered through the corporation tax scheme and is calculated as an enhanced deduction on your expenditure.

As R&D tax credits are claimed through the Tax Return, they are received retrospectively to the R&D activity taking place. You can claim back for two consecutive accounting periods, so if it is your first claim but you have been innovating for some time, fear not. You can get two years’ worth of R&D tax credits at once.

Assuming you meet the above criteria, the next two questions should be: “What counts as R&D?” and “What expenditure can I include?”.

What Counts as R&D?

The answer to the first question is the eye opening part, and why this tax incentive has been so underused previously. For tax purposes, research and development is not limited to rocket science, white coat lab research – far from it.

HMRC’s definition of R&D is that you are taking a risk in trying to resolve scientific or technological uncertainty. This means limited companies in just about any sector have the potential to be carrying out qualifying R&D if they are being innovative. For example, you could be:

–  A food manufacturer trying to modify an existing recipe to make it vegan.

–  A digital agency trying to build a new app which connects to a complicated legacy system.

–  An engineering firm experimenting with materials to meet a new specification.

–  A virtual reality hardware designer trying to overcome feelings of motion sickness in users.

You can think of the risk and uncertainty elements in the definition as being that your research and development project might not work. Interestingly, this means your innovation does not have to be successful for it to qualify – so you can recover some costs on a failed project.

Don’t overlook that there has to be a technological or scientific element to your project. However, the innovation can be in modifying existing products, services or processes as well as developing new ones.

What Expenditure Can Be Included In a Claim?

Once you have identified that qualifying R&D is taking place, the next job is to work out which costs can be included in your claim.

The biggest costs which can be included are often the staffing costs. You can calculate the proportion of relevant people’s salaries, employer’s National Insurance, pension contributions and reimbursed expenses. And you can add to that freelancer or subcontractor costs associated with the project.

Then you can consider the materials and consumables (like power, light and heat) which are used up or transformed during the R&D process. Some types of software costs can also be included.

If relevant, payments to people taking part in clinical trials are within the scope too.

The Future for R&D Tax Credits

The Autumn 2021 Budget included some tweaks to the R&D tax credit schemes.

The bigger picture is that they are not under threat, with the Chancellor reaffirming a commitment to increase Government R&D expenditure from 0.7% of GDP in 2020 to 1.1% of GDP in the future. This included sticking to a target of spending £22 billion per year by 2026/27.

Rishi Sunak also announced that from April 2023 both cloud computing and data storage costs would be added to the list of qualifying expenditure which is good news for many claims. However, he is limiting the schemes to R&D conducted in the UK, whereas previously it was available for worldwide costs.

There has been a growing concern from HMRC (and amongst the wider industry) regarding the extent to which the R&D tax credit schemes are being abused by fraudulent claims. HMRC has already bolstered its R&D tax credit team with new tax inspectors to put more claims under scrutiny.

One proposal from the Government is that companies are required to pre-notify HMRC of their intention to claim R&D tax credits for their innovation. This has been met with resistance from professional bodies.

They agree that something needs to be done to crack down on abuse, but fear that advance notification will disproportionately impact smaller and newer firms. This is because, in many cases, they will not have the resources or know how to act in time.

We await confirmation of the action that HMRC will take.

If you would like help identifying whether you are doing qualifying R&D and submitting a claim, contact our Tax Advisers on 0161 703 8353.

Innovate UK Smart Grants: January 2022

Funding competition

UK registered organisations can apply for a share of up to £25million for game-changing and commercially viable R&D innovation that can significantly impact the UK economy. This funding is from Innovate UK, part of UK Research and Innovation.

  • Competition opens: Monday 17 January 2022
  • Competition closes: Wednesday 13 April 2022 11:00am

Description

Smart is Innovate UK’s ‘open grant funding’ programme.

Innovate UK, part of UK Research and Innovation, is investing up to £25 million in the best game-changing and commercially viable innovative or disruptive ideas. All proposals must be business focused.

Innovate UK secured an uplift in funding in the 2021 spending review, which will enable us to provide an improved range of funding and business support from April 2022. This round of the competition will be the last in the current format.

Future rounds of the Smart grant will be more focused on supporting proposals from UK based innovative businesses that are destined for early, successful commercialisation, growth and exports.

Applications can come from any area of technology and be applied to any part of the economy, such as, but not exclusively:

  • – net zero
  • – health and wellbeing
  • – technologies
  • – the arts, design and media

We welcome projects that overlap with the Innovate UK Plan for Action. This is not a requirement, and we are also keen to support projects in other areas.

Equality, diversity and inclusion (EDI) considerations are highly encouraged where appropriate in your proposal. You are prompted to consider EDI as part of the application process. Applications will continue to be assessed on their innovation merit, where innovation is defined as the potential for commercially successful exploitation of ideas.

In applying to this competition, you are entering into a highly competitive process where your chance of success in securing funding will depend on the number and quality of applications submitted.

This competition closes at 11am UK time on the deadline stated.

Funding type:  Grant

Project size

Projects of 6 to18 months must have total eligible project costs between £100,000 and £500,000 and can be single or collaborative. Projects of 19 to 36 months must have total eligible project costs between £100,000 and £2 million and must be collaborative.

Your proposal

Your proposal must demonstrate:

– a clear game-changing, innovative, disruptive, and ambitious idea leading to new products, processes or services

– an idea that is significantly ahead of others in the field, set for rapid commercialisation

– a strong and deliverable business plan that addresses (and documents) market potential and needs

– a clear, evidence-based plan to deliver significant economic impact, return on investment (ROI) and growth through commercialisation, as soon as possible after project completion

– a team, business arrangement or working structure with the necessary skills and experience to run and complete the project successfully and on time

– awareness of all the main risks the project will face (including but not limited to, contractor or equipment failure and recruitment delays) with realistic management, mitigation and impact minimisation plans for each risk

– clear, considerable potential to significantly impact either or both, the UK economy and productivity in a positive way

– sound, practical financial plans and timelines that represent good value for money, which will always be a consideration in Innovate UK funding decisions

For all information on eligibility, scope, how to apply and all the information you will need please click on the link below:

Competition overview – Innovate UK Smart Grants: January 2022 – Innovation Funding Service (apply-for-innovation-funding.service.gov.uk)

National insurance rise ‘set to squeeze budgets’, warns CBI

The Confederation of British Industry (CBI) has warned the government that the planned rise in national insurance will squeeze budgets and affect economic growth.

The rise will see employers, employees and the self-employed pay 1.25p more in the pound from April 2022. From April 2023, the extra tax will be collected as part of the new Health and Social Care Levy.

Prime Minister Boris Johnson and Chancellor Rishi Sunak recently confirmed the rise, stating that it ‘must go ahead’.

The CBI said that the rise risks ‘curtailing growth at a critical moment in the recovery‘ from the coronavirus (COVID-19) pandemic.

A spokesperson for the CBI said:

‘If the government goes ahead as planned, then it is incumbent on them to use the March Budget to bring forward more ambitious plans to raise the longer-term growth potential of the economy.’

Source:
National Insurance: Rise will squeeze budgets – CBI – BBC News

COVID-19 support grants paid to companies must be included on company tax returns

HMRC has warned that businesses must declare any coronavirus (COVID-19) support grants or payments on their company tax returns and stated that the grants and payments are taxable.

The deadline for filing company tax returns is 12 months after the end of the accounting period.

The deadline to pay corporation tax will depend on any taxable profits and when the end of the accounting period occurs. It is generally nine months after the end of the accounting period unless profits exceed £1.5 million.

Grants to be included as taxable income include:

  • – Coronavirus Statutory Sick Pay Rebate
  • – Coronavirus Business Support Grants (also known as local authority grants or business rate grants)
  • – Coronavirus Job Retention Scheme (CJRS) grant
  • – Eat Out to Help Out payment.

If a company received any of these payments, they will need to do both of the following on their CT600 tax return:

  • include it as income when calculating their taxable profits in line with the relevant accounting standards
  • report it separately on their company tax return using the CJRS and Eat Out to Help Out boxes.

Myrtle Lloyd, HMRC’s Director General for Customer Services, said:

‘We want to make sure companies are getting their tax returns right, first time, including any COVID-19 support payment declarations. Support and guidance is available on GOV.UK.’

Source:
HMRC reminds businesses to declare COVID-19 grants on tax returns | HM Revenue & Customs (HMRC) (mynewsdesk.com)