BER20: Business redesign
RSM UK Tax & Accounting Limited
This blog post was produced for inclusion in the Birmingham Economic Review for 2020.
The annual Birmingham Economic Review is produced by the University of Birmingham’s City-REDI and the Greater Birmingham Chambers of Commerce, with contributions from the West Midlands Growth Company. It is an in-depth exploration of the economy of England’s second city and a high-quality resource for informing research, policy and investment decisions.
This post is featured in Chapter 2 of the Birmingham Economic Review for 2020, on Building Resilience: Future Growth and Opportunities.
Click here to read the Review.
It’s very clear that Covid-19 is having a huge impact on businesses with closures and redundancies being announced on almost a daily basis. The Government’s Covid-19 assistance measures such as the job retention scheme and business interruption loans are well documented. Below, we examine some other measures that businesses may want to consider when adapting to Covid-19.
- Managing tax payments
In recent months, HMRC has shown sympathy towards businesses suffering cashflow difficulties and financial distress and has been agreeing Time To Pay (TTP) arrangements to defer tax payments or spread them over a specified payment period. If a business has missed a tax payment or might miss their next payment, it is recommended to speak to a tax advisor or HMRC as soon as possible.
Many businesses will have already made payments of corporate tax on account of their final tax liabilities being calculated. If those businesses are now expecting a reduced level of profitability or even no taxable profits, then an application can be made now for the repayment of those instalments.
- Unlocking cash through innovation
R&D tax credits can provide SME businesses with a 44p (gross value) cash tax saving for every £1 spent on R&D. Whilst R&D claims have been increasing and awareness of the relief is more widespread than ever, the West Midlands still only accounts for 5 per cent of national R&D claims made, suggesting that there are still businesses not claiming this relief or not maximising their claims.
In order to claim R&D tax credits a business must show that there has been an advance in science or technology via the resolution of technological or scientific uncertainty. Whilst these terms can sound daunting, a good advisor who specialises in R&D tax credits can break them down into simple questions, such as:
- Are you investing resource in developing or enhancing a product, service or process?
- Have you spent time enhancing a process, or making it more efficient?
- Did the project involve setbacks, or temporary technical failures?
- Did the project require you to develop novel solutions that were not readily available prior to your work beginning?
Whilst the tangible outputs from R&D such as a new product or process are claimed widely, the more intangible outputs are often overlooked. In the wake of Covid-19 as businesses look to make their manufacturing processes as efficient as possible, there may the opportunity to claim R&D tax credits and boost cashflows further. For example, projects to cut waste, cut costs, improve run times or reduce down-time could all potentially qualify for the relief.
I recently worked with a large manufacturing business that invested in improving their manufacturing process to reduce significant periods of down-time due to errors. As well increasing their output and profit margins, they achieved a cash boost by claiming R&D tax credits.
- Corporate simplification
As businesses look to reduce both internal and external costs, now might be the right time to consider a corporate simplification exercise.
Often, group structures can grow over time, particularly where growth is achieved through acquisition. Complex group structures with numerous legal entities per country can result in additional compliance costs and take up valuable management time.
Dormant entities incur ongoing maintenance costs to the business; it is estimated to cost between £1,500 and £8,000 per entity per year to keep a dormant company, even within a simple group structure. These costs particularly affect large and listed businesses, with their greater corporate governance burden.
By undertaking a corporate simplification exercise, surplus legal entities can be eliminated in a cost-effective and tax-efficient manner.
The benefits of undertaking a group simplification and legal entity reduction can include:
- Reduction in external advisor costs (such as audit and tax compliance);
- Internal time and cost savings, allowing management to focus their time on more important issues;
- The opportunity to optimise tax planning;
- Better corporate governance and risk mitigation;
- Post-merger integration; and
- The opportunity to release capital.
Whilst Covid-19 will impose some changes on businesses such as redundancies, this time is also an opportunity to adapt and find new ways of operating to reduce costs and seek efficiency. Businesses should make the most of the tax regimes and other support available to them in doing this.
Amy Burton
Associate Director
RSM UK Tax & Accounting Limited
Amy has over 14 years UK tax experience and specialises in corporate tax for mid-size and large businesses. She has particular expertise in dealing with manufacturing and technology businesses and making claims for R&D tax credits, leading this service for the Birmingham office.