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Markel Tax

26 May 2020

Evolution and Innovation in Tax terms

Misinterpreting the concept of innovation can preclude businesses from taking advantage of some extremely valuable opportunities within tax legislation.

Ask any of your clients if they would describe their businesses as being at the forefront of innovation, and most would probably answer ’No’. However, ask the same clients if they have outstripped, or at least remained in line with, market trends in order to remain commercially viable, and it is likely they would respond with a resounding ‘Yes’.

Answering ‘yes’ to the second question—whether they have kept pace with the market—suggests that the business is likely to have  evolved and progressed in line with technological advancements and recent trends. This will inevitably have involved specific work on products and systems to remain commercially viable. This is exactly the type of work which qualifies for R&D tax relief in the UK.

If a business is evolving, it is innovating. In tax terms, innovation does not have to be ground-breaking or revolutionary; it could mean, for instance, that a business is making a product faster, lighter, cheaper or more environmentally sustainable. The work could involve prolonging a product’s shelf life, or making modifications to reflect recent technological advances within that specific sector.

There is by no means an exhaustive list of developments which a company has to carry out to qualify for R&D tax relief; the more individual and unique a concept, the more likely it is to attract beneficial tax treatment if it fulfils the criteria.

Furthermore, documenting and evidencing R&D activity can add considerable value to a business – demonstrating a proven track record and commitment to progress, whilst meeting the demands and trends within its chosen markets. When owner managers come to consider the inevitable matter of succession planning, the ultimate disposal of the business will be a determining factor. How attractive is the business as an acquisition target for either internal teams who may consider a management buyout (MBO), or for competitors who may want to increase their market share or incorporate the business to enhance their existing offering? Evidence of R&D claims can substantially enhance this perceived value.

Here at Markel, we would urge all business advisers to consider their clients’ sustainability in light of R&D opportunities.

  1. What measures have clients taken to ensure they are commercially viable in the short to mid-term?

  2. What, if any, investment has been made in future proofing the business?

A conversation about the term ‘innovation’ could prove lucrative for many clients, providing a cash windfall of up to 33p for every £1 spent on qualifying R&D expenditure for an SME business, and 11p for every £1 spent for large companies. This, coupled with the chance to demonstrate the ongoing agility of the business and its commercial awareness, could contribute considerably to the final value of the business when the current owners decide to put their planned exit strategy into action.

Identifying the full potential value of R&D activity to a company and undertaking a claim on its behalf can be complex to navigate. However, at Markel Tax we successfully submit over 750 claims a year. This is made possible by a team of highly experienced in-house technical consultants, with science and technology backgrounds in many sectors. The team is thoroughly well-qualified, with our staff holding PhDs and degrees across an array of specialisms. Furthermore, many staff have attained CTA, ATT, ACA and other professional qualifications, all of which secure a sound commercial basis to dovetail with our technological know-how.

For further information and support with these, or any other tax related issues, please contact Justine Dignam, Director of Tax Incentives and Reliefs or call Markel Tax on 0333 920 5708.

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