Adding value to your business – Using R&D Tax to increase your EBITDA by Steve Govey

Innovation is central to the strategy of most successful businesses, continuously adapting to develop new products and processes as well as adopting new digital technologies and AI to maintain a competitive edge. Business owners are increasingly searching for ways to help fund investment in IT infrastructure and the development of new software tools and products. Not only can this sort of activity qualify as Research and Development (R&D) and be eligible for a R&D Tax Relief, it can also now simultaneously boost Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). 

Whether or not you are looking to sell your business, recent changes in R&D tax legislation have resulted in an additional upside with the potential to add value to your business. HM Revenue & Customs (HMRC) have replaced the previous SME scheme and Research and Development Expenditure Credit (RDEC) scheme for large companies and introduced a new merged RDEC scheme. This new scheme applies to accounting periods beginning on or after 1 April 2024 and sits alongside another scheme for loss-making R&D Intensive companies known as the Enhanced R&D Intensive Support (ERIS) scheme. 

As with the previous RDEC regime, claimants receive relief for R&D expenditure by means of a taxable, above-the-line credit, now at a rate of 20% of qualifying R&D spend. Therefore, rather than a tax reduction or tax credit under the old SME scheme, companies will see the benefit as an additional earning and therefore increasing their EBITDA. 

As RDEC is delivered above-the-line and is therefore taxable, the net benefit will depend on the taxable profits of the company and whether the main rate of tax (25%) or the small profits rate (19%) applies. This will result in an overall net benefit of approximately 15-16.2% of your qualifying R&D expenditure. 

The key is to optimise this incentive by seeking professional support from an experienced, regulated tax agent such as Beavis Morgan LLP to identify the relevant activity and costs as well as ensuring compliance. This will enable a streamlined process that maximises value while reducing risk.  

Three tips on how to do this effectively are: 

1. Know what and where you can claim 

Most finance professionals have a broad understanding of the R&D tax credit regime in the UK. However, there is a widespread misconception that it’s too risky or the company needs to be involved in pioneering research. In fact, R&D can be applicable to most industries where the company is seeking an advantage in science or technology. Using a reputable firm to help compile a compliant claim will help ensure it is a robust and efficient process. 

New changes in legislation have also focused the benefit on UK activity and overseas subcontractors can generally no longer be included. If your company operates internationally, it is important to seek professional advice on how to best structure this work. Likewise, it is important to know the treatment of certain costs such as capitalisation and the impact on potential R&D claims.  

2. Streamline the claims process 

HMRC have formalised the information required to make an R&D claim, requiring certain cost breakdowns and a minimum number of projects to be described. All of this information can seem daunting without experienced specialist support to guide you through what is required. An R&D tax specialist such as Beavis Morgan can efficiently ascertain what projects and costs are eligible and focus on the exact information needed to compile the claim and reports on your behalf. This significantly reduces the workload needed from your company. Beavis Morgan can also utilise their in-house Corporate Tax team to file the claim, ensuring the whole process is efficient and fully integrated from start to finish. 

3. Plan ahead 

Another big change for the R&D tax scheme is the introduction of advanced claim notification forms. This requires companies to notify HMRC within six months of their year end if they intend to submit a claim. This applies to companies who are new claimants, have not submitted a claim in the past three years, or are submitting recent claims through amended returns. It is therefore more important than ever that companies get advice on their eligibility sooner rather than later to ensure this deadline is not missed and to submit these necessary forms on your behalf. 

Please get in touch to discuss your eligibility or to find out more about recent legislative changes. Contact Steve on the details below.