GrantTree

Stretch your funding with Government Grants and R&D Tax Credits

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The foundations of R&D Tax Credit claims: enhancement and surrender rates

Enhancement Once the qualifying R&D Expenditure has been calculated, the next thing is to calculate the enhancement.

R&D Tax Credits for SMEs work by “enhancing” part of the R&D expenditure. What this means is that instead of 100% (the normal amount) being deducted from the turnover to calculate the profit, a higher percentage is deducted.

This means that if, for example, you had £200k of turnover, and £100k of expenditure, all of which was R&D, and therefore your initial position was £100k of profit (which would lead to £20k of Corporation Tax at 20%), if the expenditure was enhanced by 50%, you would deduct another £50k, leading to only £50k of profit and only £10k of Corporation Tax - i.e. a £10k reduction in your tax payable.

The situation is somewhat different if you’re making a tax loss, or if the enhancement takes you into a tax loss, but we’ll get to this in the next section. In this section we’re just calculating the enhancement.

The rate of enhancement depends on the period that you’re looking at. HMRC keeps adjusting this rate, so it is always worth checking what rate actually applies to the period you’re looking at. At the moment, these are the rates since 2007 (ignore the surrender rate for now, we’ll cover it later):

Unless your accounting period exactly matches the tax year, you will have to calculate a prorated enhancement (and surrender) rate for the period. This can be done very simply by prorating based on the months at each period. For example, for an accounting period from October 1st to September 30th, there would be 6 months (October - March) at one rate and another 6 months at the next one. If the period was October 1st 2014 to September 30th 2015, the prorating would be 6 months at 225% and 6 months at 230%, so a prorated enhancement rate of (6 x 225% + 6 x 230%)/12 = 227.5%.

The Enhancement Rate includes both the Qualifying Expenditure and the Enhancement. So if there is a £100k Qualifying Expenditure enhanced at 230%, the actual Enhancement is £130k. The whole £230k sum is referred to as the Enhanced Expenditure. It’s worth paying attention to these terms, as a common mistake can be to use one amount when you were meant to use another.

If, before the R&D claim, the company was showing a tax profit (e.g. £100k), and the enhancement is smaller than that profit (thus not taking the company into a loss), then you’re done with the calculations at this point. Please move on to the CT600 preparation step.

If, however, the company was in a loss before the claim, or if the company is taken into a loss by the application of the enhancement, please proceed to the next section.

Surrender

No, not the white flag type of surrender!

Surrender, in this context, refers to giving up part or all of the loss that’s been generated by the enhancement, in order to get cash right now.

For most businesses, cash in the hand is worth more than cash in the future. However, for years, the R&D Tax Credits scheme only allowed businesses to recover cash if they were profitable (and therefore had taxes to offset). The businesses that most need the help are, of course, those which are not profitable. So, a number of years ago, HMRC introduced the ability for a business that is loss-making and that files for R&D Tax Credits to surrender the loss they’ve generated in exchange for cash on hand.

The way the process works is that if, after the claim has been applied, there is any loss, then part or all of that loss may be surrendered at the “surrender rate” in the table in the previous section.

There are a few restrictions:

The loss that can actually be surrendered is limited by two factors:

The loss that is actually present after the claim is applied: so if the company started with a £50k profit and the enhancement was £75k, the loss after the claim would be £25k, and that is the maximum that could be surrendered.

The “enhanced expenditure” amount. So if the loss was £1m, the R&D expenditure was £100k, and the enhancement for that year was £125k (at 225%), the enhanced expenditure would be £225k, the total loss after claim would be £1.125m, and the part of this that would be surrenderable would be £225k.

It is also worth noting that this cannot be stacked up with loss carried forward from previous years. The R&D Tax Credit is applied before any loss carried forward. So if you started at £100k of profit, and had an enhancement of £150k (so after claim you are at a £50k loss), but also had some loss from previous years of £200k, you could not use that £200k to get yourself to a £250k loss and thereby increase the amount you can surrender.

We know this is complicated to get your head round so if you need to chat through the best course of action, please get in touch.

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R&D Tax Credits: filing with an amended or an original tax return

At GrantTree, we deal with a lot of different companies with a lot of different approaches when it comes to filing their accounts and where/when R&D Tax Credits should be included. During the 5 years we have been up and running, we have identified the best practice to make sure a claim gets through HMRC’s labyrinths as smoothly as possible: submitting the R&D Tax Credits claim as an amendment to the original accounts. Let’s dig a little deeper into exactly why we do this and how it benefits those filing a claim.

The background:

You will already know that an R&D claim is split into the financial and the technical sections. Within the financial section at the end of your calculations, the figure needs to be inputted into a document called a CT600 (the form which, along with your Corporation Tax computations) makes up your Tax Return).

Our discovery - everybody loves a shortcut:

When an R&D claim is being processed, what we have found is that speed is of the essence. You probably don’t want to be waiting for months on end to receive your R&D claim and the way we have identified as the quickest way to get round this is crucial: do everything exactly as you have always done it. Compile and file your accounts and tax return (CT600 and computations) without the R&D amount - just carry on as normal. Once your accounts and tax return have been filed, create an amendment to your CT600 and computations which you can then re-file with HMRC.

How it works:

When a CT600 is submitted, it ordinarily goes to HMRC’s general office. The people that work there are much less familiar with R&D claims, and in our experience, are much more likely to question the inclusion of R&D figures in the CT600. We’ve found this out the hard way by going through enquiries, where HMRC can do any of the following: call for more information, write a letter asking us to expand on what was included in the CT600 and claim, or organise a face to face enquiry. All three of these types of enquiries hold up the claim being accepted. It could be an extra month, but some enquiries have in the past gone on for over a year.

By filing your CT600 in the usual way without the R&D figures and then compiling an amendment to file directly with the relevant R&D unit, it means that the amended CT600 and computation go directly to the relevant HMRC R&D specialist. They know the R&D Tax Credit scheme inside out so will be much more likely to understand your claim and ensure it gets processed in the quickest possible way. Think of them like a butcher to Tesco - Tesco may sell meat, but the butcher really knows their stuff and will be able to understand and interpret your needs more effectively.

“But isn’t that a bit dodgy? I don’t want to submit an incorrect tax return.”

Submitting without the R&D figure in the original tax return is not ‘incorrect’. It reflects the tax position at the point of filing. The amendment is purely an update to reflect the new tax position after the claim has been submitted. It allows you to bypass the legislative quagmire of HMRC and the best bit is: you can carry on doing everything as normal in terms of filing your original accounts. The only thing that needs to change is that after you have filed your accounts and tax return, you need to amend your CT600 to include the R&D figure you are claiming for and then submit this along with the claim document to the relevant R&D unit.

Well, there you have it. Our bona-fide shortcut to make sure that your application is seen by the appropriate channels at HMRC and that you can receive your claim money as quickly as possible.

If you want more information on filing amended tax returns or just your R&D claim in general, please do get in touch  and we will help advise you about the best way to move forwards. Good luck!

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The SME Instrument - an Innovate UK Alternative

This year, following the Innovate UK re-organisation, we have been advising current and prospective clients more often than before that an application to the European Commission (EC) SME Instrument mechanism is a worthwhile exercise. Although some know a little, many know nothing about this potentially lucrative source of support. What is it, how do you apply and how can it help innovators innovate?

Is it affected by Brexit?

Firstly before digging deeper, let’s address the Brexit issue. As with all funding for UK companies through European Comission mechanisms, the advice from the Commission is short and sweet. As long as the UK is legally a member of the EU, UK based companies can apply for funding without prejudice. The UK is a member of the EU until the end of the process that is triggered by the invoking of Article 50 of the Lisbon Treaty. With 6 SME Instrument deadlines set from now until October 2017, there’s plenty of time to plan a submission.

What is the SME Instrument?

The SME Instrument is the H2020 Work Programme designed to support innovation in Europe’s SMEs. Unlike much of the rest of the H2020 framework, applications can be made by single companies or in collaboration. It is a three phase funding programme, which companies can enter at either phase one or two. Phase three is a range of commercialisation support only for successful phase two projects. The yearly budget is around €92m across phases one and two.

Phase one, while optional, is a great place to start. It’s a short-ish 10 page application for a 3-6 month project that will result in a roughly 20 page feasibility study report at the end. The scope of what can be undertaken is fairly forgiving and will support; risk assessment, market study, user involvement, Intellectual Property (IP) management, innovation strategy development, partner search or feasibility of concept work. You could receive a lump sum of €50k which would cover 70% of your project costs.

Phase two is designed to support innovation activities such as demonstration, testing, prototyping, piloting, scaling-up, miniaturisation, design, market replication and the like aiming to bring an innovation idea (product, process, service etc.) to industrial readiness and maturity for market introduction. Projects lasting up to 24 months and costing between €0.5m and €2.5m are considered and the EC will cover 70% of project costs. The final report of a phase one project is an excellent basis for the much more in-depth 30 page application for this phase.

For successful applicants the EC offers up to 15 days of business coaching, three days for phase one and 12 for phase 2, designed to support business and operational development and to help foster pan-european cooperation and collaboration.

There are 13 topic areas which the mechanism supports, ranging from nanotechnology to agri-tech, although there is an Open Disruptive Innovation topic a topic dedicated to supporting new business models for inclusive, innovative and reflective societies that are agnostic to your sector focus.

Of course with SMEs from 43 countries eligible to submit an application, it is very competitive; over 2014/15, only 8% of phase one applicants were successful and 6% of phase two.

Our expert team has substantial expertise in navigating the application process, ensuring your application is in the most efficient topic area and understand how to position projects to score over the funding threshold, so if you would like to chat about your options, please get in touch.

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R&D Tax Credits: which costs qualify?

Four main categories

Let’s say you’ve identified a project (perhaps the only project your company is undertaking) and you’re trying to figure out what costs to include in the project. How do you do that?

The first thing to note is that HMRC defines only 4 categories of qualifying costs:

Direct labour: that is, employees paid directly by the company (e.g. on the payroll, in the UK or elsewhere) to work on the project.

External staff: staff hired from an external staff provider, but otherwise similar to employees - i.e. directly employed on the project.

Subcontracted R&D: parts of the project that have been extracted and parcelled out to a subcontractor, typically with a specification for what needs to be delivered and a subcontractor agreement or contract.

R&D Consumables: things that were consumed in the R&D.

The first 3 sections are relatively straightforward, though it’s worth noting that external staff that’s provided by a connected party can count as direct labour. A connected party is another company that is “connected” to the claiming company. (link to connected and partner enterprise)

Exceptions:

Of course, this wouldn’t be fun without exceptions!

Even though HMRC will happily declare, that these are the only 4 categories of costs that qualify, and use that to reject various costs that you want to include, their own web page states otherwise.

Additional costs that are explicitly states as qualifying are:

payments to clinical trial volunteers (of relatively little relevance to startups)

software licences

utilities (power, fuel - but not data or telecommunications costs!)

In practice there are some other costs that will qualify as well, even though they are not listed here, and may be rejected by some R&D units.

As for why heating and lighting qualify for R&D relief, but data costs do not, I leave that up to the reader to divine.

Let’s talk numbers:

Employees

The process for adding the costs up for employees is very straightforward:

For each employee, calculate the “total emolument” for the employee - that’s the cost of their gross salary, Employer’s NIC, pension, and bonuses that are R&D related.

Multiply that number by the percentage of R&D involvement the employee had.

Add up all the resulting numbers: this is the qualifying R&D expenditure for employees.

Example:

Subcontractors

As mentioned earlier, subcontracted projects either count as a whole or not at all, and are apportioned at 65%. The process is fairly similar, except that there are no arbitrary percentages, and the table ends up looking fairly similar:

Externally Provided Workers

EPWs are halfway between subcontractors and permanent staff. Unless they were hired purely to perform R&D, they will often have a percentage apportionment for their time. This percentage further needs to be multiplied by 65% to arrive at the final apportionment. Again, if the EPW charges VAT, that should not be counted as part of their cost.

Remember that costs do not include VAT.

Note that if a subcontractor did more than one project for the claiming company, only the projects that were part of an R&D project should be included here.

R&D Consumables and Software Licences

There are various ways to calculate these, but we find that they generally fall into two categories: apportioned expenses, and wholly R&D expenses.

Things like “Light and Heat” are typically apportioned based on the R&D percentage of the company’s total activity. This R&D percentage is basically calculated by adding up the percentages of all the people using the service/consumable, and dividing it by the total number of people. So, for example, if you had 5 people in the office with R&D involvements of 10%, 30%, 30%, 40% and 80% respectively, you would apportion 10%+30%+30%+40%+80%/500% = 38% of the Light and Heat costs to R&D.

This method of calculation should be applied to things like Light and Heat, which are accepted by HMRC as acceptable R&D consumables, but which are shared between other people.

The other method applies to consumables and software licences that are wholly consumed by the R&D process. In those cases, the entire consumable cost is included, at a rate of 100%.

For more steer on what qualifying costs to include, get in touch to make sure you are not over (or under!) claiming. Good luck!

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Preparing the CT600: the last piece of the jigsaw

Sample CT600:

It is essential to know exactly how and where to put your R&D claim figure in a tax return, otherwise it will impact on your entire claim document, often resulting in an HMRC enquiry to get to the bottom of why they perceive your calculations as incorrect. Obviously, this is not ideal since HMRC enquiries can be long and painful, and cost a lot of effort to resolve..

Before you begin: the first amendment

When you file a claim, you need to submit the claim document with both technical and financial sections, plus the tax return, which consists of a CT600 and tax computations. In the 5 years we have been operating, we have identified that the best way to ensure your claim speeds through HMRC without an enquiry is to file your accounts and tax return as normal (without the R&D claim amount) and then file an amended tax return (link to R&D Tax Credits: filing with an amendment versus filing with the original tax return) directly with an HMRC specialist R&D unit which includes the R&D claim amount. The reason for this is that it ensures that the claim is seen by a specialist who knows about R&D Tax Credits. In our experience, when the claim is submitted to the central tax office, it occasionally gets picked up by an HMRC inspector who is not familiar with R&D Tax Credits. If that happens, they see it as an opportunity to learn R&D Tax Credits (at your cost!), and not only are they guaranteed to have questions (thus causing delays), but those are likely to be fairly nonsensical questions that an experienced R&D inspector would never ask.

This article will outline the steps necessary to include your R&D claim figure and is written with the assumption that you are using this process of filing an amendment and that you are working from your already-filed CT600.

The starting line: which software to use

We cannot provide comprehensive documentation for how to do this in all the numerous software packages that can be used to create a CT600. Internally, we use something called TaxFiler. It should be relatively easy to adapt the instructions to another software package, so long as the system supports R&D Tax Credits claims and your tax computations are not too complex. As usual, if your tax computations are too complex to do this easily, we recommend that you use a specialist or at least get your accountant involved. It’s important to get this right, as HMRC can apply penalties if mistakes are made.

Once the CT600 has been set up in TaxFiler, the following steps are necessary to add in the R&D Tax Credits claim:

Adjust Trading Profits

First, before adding the R&D section, you should go into your existing “Trading Profits” section and add the R&D Expenditure there. After you’ve created your CT600 and set it up to reflect your pre-claim tax computations, go into Data Input and click on the Trading Profits section.

Within Trading Profits, click on the “Adjustments to trade profit” tab and then scroll down to the “Enhanced Research & Development expenditure” section and click on Edit:

Finally, set the correct enhanced expenditure and enhancement amount:

Add “Research & Development Tax Credit” section

Go back to the Data Input section and Add a new section for Research and Development Tax Credit:

And similarly set the second tab data. Many sections are auto-calculated but you can override the calculations in some cases (particularly if there are rounding issues).

That’s it! Your CT600 is now correctly amended. Don’t forget to attach the tax computations and the Technical Narrative (including the calculations table explaining how you arrived at the total R&D figure) when emailing the specialist unit, or else, once again, you risk delays and extra scrutiny.

Hopefully this article has provided you with enough information about how and why we file an amendment this way, and how to do it yourself. We find it helps claims get to where they need to be and get back to you again in the fastest possible way.

Of course, the tax return document needs to be 100% accurate and reflect the tax position of the company at the time of filing so if you need any guidance or advice, please get in touch and we will help you with the best way to move forward.

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After Brexit – Business Led Innovation Support

2016 has been a year of turbulence, both politically and socially. While it feels like it’s probably worth waiting for at least the next thing to happen before commenting, we feel that there’s sufficient information and insight available to offer a sensible analysis of how all our Innovation funding clients, partners and friends might navigate the immediate future.

After Theresa May was sworn in as the UK’s new Prime Minister on the 13th July, a swingeing cabinet reshuffle not only changed the makeup of the Conservative front bench, but also rearranged some key government departments.

Greg Clark replaces Sajid Javid as Business and Energy Secretary in a new department stripped of its oversight of Further and Higher Education which after a 9 year absence returns to be within the policy remit of Justine Greening’s Department of Education, but with additional policy responsibility for Energy and Industrial Strategy.

UK Innovation Funding

The restructuring has been broadly welcomed although there is currently no evidence to suggest how the “comprehensive industrial strategy” that the new department is charged with delivering will impact on general government support for innovation and R&D.

We will have to wait to understand the impact of the restructure on Innovate UK’s future. There had been rumours for some time concerning a possible merger between Innovate UK and Research UK and  the recent Higher Education and Research Bill does indeed pave the way for this to happen, although there are calls for the bill to scrapped and it is unclear how it might be implemented needing cross department coordination. Innovate UK is seemingly preparing for change and alongside the new grant funding framework they are piloting a few new funding models over the year, the first contract-based opportunity is live now.

Innovate UK funding will continue to exist and will continue to be competitive. We strongly recommend allowing plenty of time to prepare an application, especially with the new collaboration requirements for projects over £100k in the sector-specific competitions.

EU Innovation funding

And so. The elephant in the room. UK business’ access to European Commission H2020 funding. We are confident that it is business as usual until we hear otherwise. The European Commission issued a clear statement on 4th July confirming that until the UK legally leaves the EU, businesses are able to participate and receive funding from H2020 actions.

Of course we have no ability to predict when exactly the UK will no longer legally be part of Europe, but we will at least have 2 years’ notice. The H2020 work programme and budget is updated every two years with the 2018-2020 work programme currently in development. It’s either optimistic or encouraging, but the UK has been submitting consultations for the final H2020 work programme as recently as 5th July. This framework indicates UK companies will be welcomed as applicants until at least March 2018.

We have heard rumours and anecdotal evidence of European funding being pulled or put on hold and understand the concern around the issue. Our own research indicates many reports are not making a distinction between ERDF, part of the ESIF, ERC and H2020.

ERDF and the other ESIF funding mechanisms are for long-term infrastructure support. It’s therefore not surprising projects are being put on hold until the withdrawal process is clarified as many upcoming funding agreements are for projects lasting 3 years or over. ERC funding is similarly suffering from frequently being long-term in its scope. With funding sought for multi year projects, it is not surprising that consortia are not keen on including UK researchers who may be unable to participate for the whole project.

As with UK innovation funding, we will keep abreast of all the latest news and pass on any information as soon as we understand the implications. For now, the best advice is to keep applying to the upcoming H2020 streams, with well-developed projects, as they are opportunities that UK business are still emphatically eligible for. For more information on how to kick off the process of applying for a grant, get in touch to have a chat with a government funding expert.

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How Brexit affects the R&D Tax Credits scheme

Whilst the Brexit vote has temporarily rattled the UK’s tech industry, the dust is now settling and we begin to look to the future to figure out what form post-Brexit may take. Here we explore the past and future relationship between the EU and the UK’s R&D Tax Credits scheme.  

What does the EU have to do with R&D Tax Credits? 

A peculiar aspect of R&D tax relief is that there are two different schemes running in parallel: one is the RDEC (Research and Development Credit), formerly known as the Large Companies Scheme, and the other is the SME scheme, which is far more lucrative than the RDEC scheme. The EU regulates the SME scheme, which operates under what is known as the State Aid rules.

State Aid regulations are imposed on national governments to ensure fairness in competition for companies across the EU, and financial support as generous as the one provided by the SME scheme requires approval from the European Commission in a process known as ‘notifying’ the State Aid. Other schemes such as the SEIS and funding from Innovate UK also fall within notified State Aid. In short, these regulations define the characteristic requirements of a SME and prevent projects from receiving financial assistance from multiple sources in an unfairly advantageous manner. This is the reason why the interaction between grants and R&D Tax Credits can be complicated if you are claiming R&D Tax Credits yourself and why it is important to ascertain whether the grants fall within State Aid or other rules pertaining to subsidised expenditure. However, receiving a grant does not prevent a company from being eligible for R&D Tax Credits. As previously mentioned, R&D Tax Credits consist of two schemes; while the SME scheme is subject to State Aid rules, a company who has received a State Aid grant would still be eligible for the RDEC scheme. 

Would we lose R&D Tax Credits when we Brexit? 

Honestly, it’s not possible to say with absolute certainty how the R&D tax relief will change. In the past decade, the government has demonstrated that it is supportive of innovation and its determination is reflected in its increasingly generous R&D tax relief schemes. We have already seen the lift of the cap on payable tax credits in April 2012 when companies began receiving more than they paid into HMRC (prior to April 2012, the amount payable was restricted by the company’s corporation tax and PAYE contributions), and the incremental increases of the enhancement rates (from 150% before 2008, to 175% in 2011, to 200% in 2012 and the current 230%) and the surrender rates (from 11% in 2012 to the current 14.5%). 

Philip Hammond, the new Chancellor, has confirmed that there would be no emergency budget on 14 July, and he has hinted that there may be a spending surge to counter Brexit shock. We won’t know for certain whether corporate tax will be cut to 15% or what any of the tax schemes will be until the Autumn Statement, but it is unlikely that the R&D tax relief schemes would be scrapped and if the Chancellor’s statement holds true, then it is probable that changes to the schemes will be more generous than previous years. Could Brexit lead to a greater amount of R&D Tax Credits available under new domestic rules? 

Here’s a thought experiment with the UK outside of the EU: could Brexit lead to a greater amount of R&D Tax Credits available because the schemes are no longer subject to EU regulations? 

Yes it could. The EU imposes regulations on the SME scheme to ensure a level playing field for European businesses by restraining the subsidies national governments can provide.This is called “State Aid” regulation. So it is technically possible that once the UK is outside of the EU, the UK will be free to offer companies all the money it wishes. For example, it could technically allow companies to claim Tax Credits on expenditure for which a grant has also been awarded. 

However, we don’t think that will be the case because there are many other areas where there’s been clear interest in removing EU red tape (e.g. VAT), and State Aid regulations would likely be of very low priority to the Brexit government. Furthermore, removal of the EU State Aid regulations without replacing it with similar regulations would likely lead to abuse of the schemes. So far, these EU regulations have been effective in preventing the unfair advantage of “double dipping”, and if the UK were to remove the EU red tape, it is probable that similar domestic regulations would need to be put in place in the hopes that they could achieve the same result. So there’s little incentive for the government to make that a priority in the first few post-Brexit years. 

What can we do in this uncertainty? 

Whilst we’re trying to be optimistic about Brexit, there is little doubt that London has been shaken by the outcome of the referendum. We have heard stories of investors pulling out of funding rounds and companies putting recruitment efforts on hold. A lot of the detail about the next steps is up in the air, so for now it is a waiting game until we see which way the wind is blowing for Britain’s tech hub future. 

In this Brexit tumult, uncertainty around money and funding rounds has become increasingly prevalent. GrantTree’s Advance Funding product allows us to cash advance you up to 50% (up to £25k) of your claim value within 48 hours of filing; you then receive the remainder when HMRC verifies the claim, which typically takes about 5 weeks. For more information on Advance Funding or for a general chat about how to go about claiming R&D Tax Credits or grants, please get in touch.  

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Testing the connection: linked and partner enterprises

If you checked out our previous post, you will understand the importance of being autonomous in your R&D claim. However, sometimes your company (or you!) are a linked or partner enterprise and this is particularly important as it can affect whether your company is deemed an SME and your eligibility for the R&D Tax Credits scheme.

Linked Enterprise:

In short, your company is considered to be linked to the owner of your shares if one of the following is true:

the other company owns more than 50% of the voting rights,

they can appoint or remove a majority of your management team,

they can exert a “dominant influence” over your company,

they can indirectly achieve the above via agreements with other shareholders.

Basically, if they control your company, you are “linked”.

Alongside this, it is possible that you can be linked through an individual as well, providing you are both in the same industry. A good example of this is if you were running a small SME airline and Richard Branson personally owns 51% of your company, you are also linked to any other companies which he owns 51% or more of (ie potentially Virgin Airlines).

This is particularly important as your numbers would then be aggregated with the others, meaning your company would likely not fit in under the SME scheme and the R&D Tax Credits become a less attractive option. This would also apply if you were linked to a VC fund which manages, say, more than €50m.  

Partner Enterprise:

There is another case to consider - if you are not autonomous, but the other company is not considered linked. For example, if PartnerCo owns 30% of your business, you’re a partner of PartnerCo, but they don’t control you, so you’re not linked.

So what happens then? Well, you may have a chance to still fall under the SME R&D Tax Credits scheme. To figure it out, multiply the shareholding by the turnover, balance and staff count of the other company. For example, if you were 30% owned by PartnerCo back when they only had €10m of balance, they would only add €3m to your own balance, for the purpose of figuring out whether you’re an SME. So if you had €1m of balance, adding the two together would result in €4m, well under the SME limit.

If you had €1m of balance, and 30% owned by PartnerCo when they were worth €100m, your balance aggregate would be €31m - so you would still be an SME, even though PartnerCo would not be.

Finally, if you were 30% owned by PartnerCo when they had €1b of balance, your aggregate would be €301m, so you would not be an SME.

It works in reverse too!

As a final thought, it’s worth pointing out that this works both ways. If your company owns more than 25% of a large company, you are considered in aggregate with that company, so even if you have zero turnover, you will still not be considered an SME.

In this latter case, you would still count as autonomous, however, because Sequoia is a venture company. HMRC explicitly allows up to 50% ownership by:

public investment corporations and VCs,

individuals or groups of individuals with a regular venture capital investment activity who invest equity capital in unquoted businesses (‘business angels’), provided the total investment of those business angels in the same enterprise is less than €1.25 million,

universities or non-profit research centres,

institutional investors, including regional development funds,

autonomous local authorities with an annual budget of less than €10 million and fewer than 5,000 inhabitants

Still confused? Please don’t hesitate to get in touch! We are always happy to help you explore your funding options, regardless of the size of your company.  

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GrantTree hits 1000 claims filed!

Earlier this month, we had the privilege of filing our 1000th claim here at GrantTree and we are over the moon about it. Like the majority of startups, we were borne out of an idea back in 2010 and since then we have grown from strength to strength; we are now a team of 28, the owners of a fantastic new shared office building called Treehouse, which currently harbours Crowdcube, Solarcentury and TabMo and we have a kick-ass Open Culture to boot!

To have filed 1000 claims and raised over £30m in government funding for innovative UK companies is a feat that was unimaginable 6 years ago. At GrantTree, we want to give a huge shout out to all the fantastic companies - and the people who are part of them - who we have worked with. You are the reason we come into work in the morning and the best part of our jobs is seeing what incredible projects can be achieved through R&D Tax Credits and Grants, so congratulations and thank you.

Anyway, enough about us - time to reveal which client was our 1000th claimant...drum roll please…

Our 1000th claimant was Small Pharma (cue party poppers and confetti)! Small Pharma is a company developing niche pharmaceuticals which are overlooked by big pharma, with an exciting lead project in treating mental health.

Thank you again to all of our clients - we are very proud to work with each and every one of you. We are committed to helping all our clients make the most out of the funding available to them, so onwards and upwards to our 2000th claim!

If you need help with filing your R&D Tax Credits or a grant application, please get in touch to have a chat with one of our expert funding advisors.

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Patent Box – The New Regime

Since its introduction in 2013 as part of a broad range of measures to encourage business-led innovation in the UK, Patent Box has been mired in both controversy and confusion. On the eve of a set of changes to the rules that particularly affect SMEs, we hope to demystify the new scheme and help you understand how and when it might apply.

A Bit of History

Patent Box was initially designed to help encourage companies generating patents to stay in the UK to exploit their IP assets and to make the UK an attractive location for patent holders from around the world to come to the UK commercialise and develop their IP. The scheme allowed companies to use the framework to apply a 10% tax rate to any profits earned from any products that incorporate patents, at the time a significant saving. The UK was relatively late introducing the scheme in comparison to countries such as Ireland and France whose schemes were introduced in the early 2000s.  

While the OECD was investigating international base erosion and profit sharing (the BEPS project) in 2013 they took the view that Patent Box, as well as other preferential IP regimes around the world, was ‘harmful tax practice’. In short the schemes, by accident or design allowed large multinationals to move their IP, and the profits that followed around the world significantly benefiting from lower tax rates while carrying out virtually no activity in the jurisdiction.

The European Commission was concurrently investigating the same schemes in Europe prompting the UK and Germany to pre-emptively table a plan to resolve the contentious aspects of Patent Box and its equivalents. The OECD and all G20 countries have accepted the plan, with modifications, as the new global standard for IP asset tax incentive regimes.

As the basis of the new Patent Box rules, the ‘modified nexus approach’ was agreed in 2015 and has been subject to an international timetable of implementation, which sees all previous schemes close to new applicants on the 30th June 2016. The shared foundation of all new schemes only allows a company to benefit from a scheme when it can show that it itself undertook significant activity within the jurisdiction, such as R&D, which gave rise to the income the IP generates.

New or Old

The new regime is applicable to any company that elects to join the scheme after 1st July 2016 with any patent application that is filed after that date. Any companies that have existing IP assets filed prior to then generating profits or not yet generating profits and are already elected into the scheme will be able to benefit from the old regime until 2021. There is currently no guidance on how companies benefitting from ‘grandfathering’ the old regime will access the scheme post 2021, but it is relatively safe to assume that they will have to comply with the new rules.

No matter which scheme you are benefiting from, the phased introduction of the original Patent Box is still being enforced, so the full benefit will not be able to be claimed until April 2017 anyway.

How it works

A company files a number of patents after 1st July 2016 and elects to be part of the scheme.

Patent Box relief is given to the income that is generated from those IP assets. An IP profit calculation is made, in the same way as the previous rules and the rate of Corporation Tax paid on the qualifying profits is reduced to 10% as part of the company’s Corporation Tax calculations.

The new regime that the company is elected into has two main differences to the old;

All companies must now ‘stream’ their income from each qualifying exploited IP asset (each IP right or product). This requires separating the income and expenditure for each stream, identifying non-IP income and applying the calculations to each stream individually. This could become quite cumbersome for SMEs with multiple patents and limited accounting and administrative capacity.

The new scheme also requires companies to subject the IP profit calculations to an additional modifier to prove that there is a direct ‘nexus’ or connection between the income receiving benefits and the R&D expenditure that contributes to that income. The nexus calculation differentiates between expenditure on R&D in an in-house capacity, subcontracted to a 3rd party and subcontracted to related parties in the same way as the R&D Tax Credits scheme. In addition it also takes into account IP acquisition costs. Once all the expenditure is inputted to the formula, should the result be less than 1, the qualifying profit will then be reduced accordingly.

When to elect in

As is now hopefully clear, the scheme is only going to make any impact on your Corporation Tax liability if you are generating revenue for the exploitation of an IP asset, or assets. Therefore there is no need to consider Patent Box until then. In order to benefit though you must elect to be part of the scheme within 2 years of the end of the account period within which the relevant profits are made so retrospective election into the scheme is limited.

Our advice is that at the point of applying for or acquiring a patent it is prudent to begin recording the relevant R&D expenditure in advance of revenue generation to simplify the nexus calculation later on.

In summary

If you are generating profit from the exploitation of IP assets it is worth considering Patent Box under the new regime. Even with the upcoming reduction of the Corporation Tax rate to 17% in 2020 it will make a difference to your liability. The scheme is compatible with other UK measures to support R&D and innovation and implementing streamed accounting practices will negate much of the potential administrative burden of the new rules.

You can speak to our team of experts about your Patent Box suitability as part of a suite of R&D Tax Credits and Grants products that we offer, or just to get some general guidance around the scheme.

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Is your technology ready?

When looking into grant funding it’s not unusual to become very confused very quickly. What stream of funding should you apply for in relation to the R&D that you want to do? Are you going to be conducting industrial research or experimental development? Can you do both in the same project? Questions about where your plans fit in funders’ frameworks are important to answer accurately, after all it can dramatically affect not only the amount you can apply for, but also the reimbursement rate you are entitled to claim.

The language used by funding bodies to talk about your development cycle may not feel like it accurately describes your plans, but it’s worth remembering that it has to capture the development stages of industries as diverse and different as software, medical devices and new drugs, manufacturing processes or space technologies. While software might have a shorter development cycle where MVP or beta tests allow developers to have a product in the market enabling steps to be missed entirely, medical device development has clearly defined steps that lead to certification allowing for a less fluid development cycle.

When considering where your project fits, it’s worth thinking about the base framework on which most funding is based. Technology Readiness Levels (TRL). Originally developed by Nasa in the 80’s this 9-stage framework has become the basis for Innovation funding bodies. The European Commission has adopted it as their framework for all the H2020 steams and topics and Innovate UK are increasingly using it as a reference for their own development descriptions.  

Depending on the topic and the type of action, H2020 funding will generally fund development of technology that is already at TRL 6. Streams such as the SME Instrument Phase 2 and Fast Track to Innovation are examples of funding specifically designed for individual SMEs or SME led consortia respectively. Other streams such as the SME Instrument Phase 1 are for projects that are earlier in the development cycle, but as the focus is on market analysis and development, the funding can be applied for with technology that might be later in the TRL framework already developed. For Research Actions, Research and Innovation Actions each topic defines the expected TRL of the technology development it will be supporting.

Innovate UK has recently simplified their support framework and is primarily focused on supporting innovations that are already at TRL 4-7. The new funding framework allows for projects to mix R&D outputs categorised as: feasibility studies, industrial research and experimental development. There is still the opportunity to conduct market or fundamental research through the Open funding competition, but the sector specific competitions are likely to follow the lead of the Manufacturing and Materials competition in only supporting technical development.

Our innovation grant experts will be happy to discuss how your R&D fits into the landscape and help you ensure that you are applying for both the most financially efficient stream and the one that is going to accelerate your product to market the quickest.

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Should you surrender your R&D Tax Credits Losses?

If you’re unprofitable, you can use a mechanism called “surrendering your losses” to get some cash out of R&D Tax Credits even though you have no profits to offset. But should you?

The short answer is: in most cases, yes, but not always.

If you had all the time in the world, it would be more advantageous to carry the loss forward and offset it against future profits, at a rate of 20%, than to surrender it immediately at a rate of 14.5%. However, in order to be offset successfully in future years, there need to be actual profits in those years (and there needs to be future years, but let’s stay away from disaster scenarios here).

The key concept is: if you are expecting continued tax losses in future years (and don’t forget to factor in future R&D claims in this!) then you should definitely surrender the present loss.

Even if you are expecting profits some time in the future (who doesn’t!) you should consider how far, how certain, and how large those profits will be. The formula for discounted cash flows is relevant here.

Discounted Cash Flows

Discounted cash flows allow you to represent the fact that cash in a year’s time is less valuable than cash in hand today. The way it works is by proposing that if you had the cash in hand today, you would be able to invest it wisely in productive projects within the company, that would provide a return on investment. So if you can only get the cash in a year’s time, that means it needs to provide at least as much of a return as it would have if you had been able to invest it.

Assuming your business is able to make use of funds to get a fairly reasonable 10% “internal rate of return” (IRR) on its own assets, then £100k today will be worth £110k in a year. Conversely, £100k received in a year is only worth £90.9k today. This means that at a 10% IRR, 14.5% today is worth 15.95% next year, 17.54% in 2 years, 19.29% in 3 years and 21.22% in 4 years. This means that at a 10% rate of return, if you have to wait 4 years to be able to exercise your loss it is definitely better to surrender it today, because you will get more money over that period, by getting the 14.5% today and investing it in your company immediately.

IRR for tech companies

Most tech companies (and particularly startups, but also more mature businesses) that are loss-making and spending money on R&D tend to be looking at either a much higher than 10% growth rate, or no profit prospects at all. At a still fairly reasonable 50% growth rate, 14.5% today is worth 21.75% next year - so for a company with high growth potential it is always worth surrendering the losses today, no matter what might happen next year.

The above calculation doesn’t even take into account uncertainty. If you think you’ll be profitable next year, you may be… but you may not be. Factoring in the risk, we find that it is almost alway worth surrendering any amount of loss you can, for cash today.

There is one exception, which is very rare, but which is a very high-growth, high expense startup that has been spending a lot every year and is just about to stop increasing their expenses and switch into “profitable” mode, and is very well managed and very certain about what they’re doing. If you are convinced that you’re about to go from a £500k tax loss to a £1.5m profit, and you have plenty of cash in the bank to fund every project that has a return, then it will be better to keep the loss unsurrendered and exercise it the next year. This case is, unfortunately, quite rare, though we have seen it.

If you need guidance about anything written in this article, please get in touch. Surrendering losses and predicting profitability can be very nuanced and we at GrantTree are here to help you make the most out of your funding. 

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Innovate UK Manufacturing and Materials funding

Innovate UK recently launched the first competition from their revised 2016/17 funding framework: a £15m investment supporting innovation in the Manufacturing and Materials sector. The first of the new, simplified competitions focuses on supporting four key sectors:  emerging and enabling technologies; health and life sciences; manufacturing and materials and infrastructure systems will run this year.

The Manufacturing and Materials competition opened on the 9th May and requires applicants to register by the 6th July. The deadline for submissions will be a week later on the 13th July. Innovate UK has indicated an assessment window closing at the end of October, prempting a high volume of applications to this new structure.

The funding will specifically support innovation in: manufacturing systems, technologies, processes or business models, materials development, properties, integration or reuse. The scope is wide, but successful proposals must have cross-sector applicability and show that the funding will have a step-change impact on the productivity and competitiveness of at least one UK based SME.

Of particular interest for this round will be applications that are addressing the novel application of a digital technology or approach to manufacturing or materials development (such as automation, modeling and simulation, data analysis) or design for manufacture, use and end-of-life. Innovate UK is going to change this preference for each round.

The funding is designed to support innovative projects conducting feasibility studies, industrial research and experimental development. Projects may span more than one category of research. Unlike previous year’s funding, applications must focus on technology development, early stage market research and stakeholder engagement activities are not going to be supported.

Applications are expected to be submitted in one of two streams;

Stream 1 will support projects under £100k in size and 12 months in length. Applications for this stream can be either delivered by a single organisation or collaborative. A pot of £5m has been assigned to this stream.

Stream 2 will support projects over £100k and under £2m that last between 12 and 36 months. All applications in this stream must be collaborative. A pot of £10m has been assigned to this stream with Innovate UK indicating that it will be split evenly between projects that are 2 years and 3 years in length.

Funding rates vary depending on the activities your project delivers. For feasibility studies and industrial research, 70% of eligible costs are claimable for SMEs and for experimental development, 45% of costs are claimable. For larger companies the rates are reduced.

If you’re familiar with the previous Innovate UK application process, you’ll notice that this new framework is not too dissimilar from the old SMART framework. There’s 10 individual questions about your innovation, the market opportunity, your team, the project plan, finances and risks and how Innovate UK add value to the project.

There’s fewer appendices allowed than in previous years, so there’s even more importance than ever on presenting the information about your project to the assessors in a clear, concise yet exciting way.

Our expert consultants and writers have had great success securing Innovate UK funding over the last few years with clients in the digital manufacturing sector and have helped develop R&D plans with impact beyond the funding. We’d love to hear from you to discuss how we might be able to support your application development, so if this sounds of interest, get in touch.

For more information there’s still two more briefing events; 26th May in the West Midlands and the 27th in Manchester for you to attend. We were at the London event earlier in the week and can highly recommend them.

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The Importance Of Being Autonomous

When filing an R&D Tax Credit claim, you may think it is just formed from the technical and the financial data, but there are many layers to consider in your R&D claim cake. One of these extra layers is reviewing the position of your company in a wider context - ie its autonomy, as it can drastically impact on your claim. If a company is not considered autonomous, then special rules apply to determining whether it is an SME.

What is the importance of autonomy for an SME?

The R&D Tax Credits scheme is notably more lucrative if you are claiming as an SME; however, sometimes smaller companies are part of a bigger group and not completely autonomous. It is essential this is explored and reflected in your application, otherwise your company could be at risk of an HMRC enquiry - as mentioned in earlier blog posts, this is something you want to avoid!

HMRC defines a business as clearly autonomous if no external, corporate entity owns 25% or more of its shares, and if it doesn’t own 25% or more in any other company. If that’s the case for you - great news, you can skip the rest of this post. If not, read on:

Examples of autonomy in the wild:

Let’s consider Company A and Company B, without specifying which one is which. There are two ways the companies might be connected: linked, and partner.

Company A and Company B are considered linked if:

A owns more than 50% of the voting rights of B; or

A can appoint or remove a majority of the management team of B; or

A can exert a dominant influence over B; or

A can indirectly achieve the above via agreements with the other shareholders.

Company A and Company B are considered partner enterprises if:

A owns between 25% and 50% of B

But if A is an investor-type company then they are not partners at 25-50%, only above 50% (at which point they are linked, not partner)

A is an “investor” type of entity. This includes:

public investment corporations, and VC firms;

angel investors, provided the company has not raised more than €1.25m from those investors;

universities and non-profit research centres;

institutional investors, including regional development funds;

autonomous local authorities with an annual budget of less than €10m and fewer than 5,000 inhabitants.

Well, that’s quite a piece to digest.

Determining your SME status:

Assuming your company is connected to another, here is the impact in terms of determining your SME status:

If two companies are linked, then they are considered to be part of the same group for the purpose of determining the SME status; so all of Company B’s staff, turnover and balance count in the calculation of the status of Company A;

If two companies are partner enterprises, then a percentage of Company B counts towards Company A’s staff, turnover and balance sheet. So for example, if A (200 staff) owns 30% of B (100 staff), then A will be considered to have 230 staff for the purpose of determining SME status.

The R&D Tax Credit scheme is much more lucrative if you are an SME, but it is still worth doing, even if your company is not autonomous and gets pushed into the RDEC (Large Company) scheme - more on this later. If your company is not an SME, you should almost certainly get professional advice for your Tax Credits, as the rules for large companies are substantially different.

Still confused? Please don’t hesitate to get in touch! We are always happy to help you explore your funding options, regardless of the size of your company.  

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How to write a kick-ass technical narrative

This is the best bit, the one you’ve all been waiting for...how to write a kick-ass technical narrative. By now, know how to nail your technical narrative before you begin writing it and assembling the skeleton structure of your narrative, now, let’s flesh out the skeleton of your narrative to create something HMRC will actually want to read.

Typically, the technical narrative explains your projects/features/challenges you encountered throughout the R&D process. Think of it like the blueprint for showing HMRC exactly what you were up against and how you made progress with your projects for your the years you are claiming for.

Remember: approach this from a technical viewpoint, not a managerial one.

As mentioned previously, the technical narrative is a document that explains the complexity of your project to HMRC. It needs to be constructed from a technical viewpoint (as opposed to a managerial one) and focus on the technical obstacles that were overcome – as opposed to focusing on the process. HMRC want to see you demonstrate how your work was technical complex so give ‘em hell … show how hard you worked and wrangled out a solution for your project – usually, the trickier a project was, the more likely it was that it was R&D.

Keep it simple: 1-3 projects will suffice

HMRC will receive thousands of these applications every single year. As Mark Twain quipped: “sorry for the long letter, I didn’t have time to write a short one”. This doesn’t mean you write a sentence or two about your R&D technical projects but the good length of a technical narrative is 2-5 pages of A4, encompassing 1-3 technical projects. Focus on the key elements of your technical narrative, such as the major challenges and features.

Crucially: marry up the technical to the financial data.

Naturally, you’ll also want to put your best foot forward, so when picking which projects to present to HMRC, be sure to pick the ones that are most R&D-like. Also (and this may go without saying), the claim will consist of the technical data and the financial data. Be sure to pick the R&D projects which you are claiming for, otherwise HMRC may be slightly confused if you are talking about one project in the technical narrative and see no evidence of it in the financial section of your claim!

If these blogs haven’t provided you with enough breadcrumbs to navigate the technical narrative maze, here is an example, based on one of GrantTree founders’ earlier businesses, Woobius. It’s worth noting that we would consider this a tech data collection of extremely good quality. The output from this stage doesn’t have to be to this standard, but it gives an example of what to aim for.

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Sample Technical Narrative: (constructed from the technical data gathered earlier)

Leadership and role of Woobius

Even on relatively small construction projects, there might be more than twenty independent companies collaborating over a long period. Architects, engineers, surveyors and contractors have to exchange drawings and figures which are then repeatedly revised and corrected over the course of the project. The coming together of such a diverse group of people on a critical project can be the cause of very costly mistakes if there isn’t a clear and easy way for the different parties to share information. Once a building is under way, any mistakes made during planning can result in structures having to be removed or remade and arguments between the parties that can end in the courtroom.

While large construction companies are well served by bespoke project management software made by large software vendors at a high markup, the rest of the industry has to make do with off-the-shelf, general-purpose project management tools not made specifically for architects or small-scale engineers.

Woobius was founded to level the playing field, providing small players in the construction industry with revolutionary collaboration tools designed specifically for architects. With Woobius’ tools, surveyors and architects can concurrently work on hundreds of drawings and documents in real-time, making collaboration easier and costly mistakes less likely.

Experienced architect Bob Leung created the company in 2007 with serial entrepreneur Daniel Tenner. Since then, through word-of-mouth alone, the company has grown from 15 initial test users to over 2,500 users working on over 100 projects in 27 countries. The early success of the company has been acknowledged with its winning ‘One to Watch’ and ‘Best Mobile Product’ gongs at the Construction Computing Awards.

Claimed technological advances

On a typical construction project, twenty or more different parties in different locations will be working on hundreds, maybe thousands, of large PDF documents containing detailed plan drawings. Each drawing is likely to be revised many times by different parties, sometimes concurrently. As a result, to avoid mistakes and overriding others’ changes, architects and planners need software that immediately shows other parties’ changes to drawings and that leaves an audit trail so that everyone knows who made what change when.

Over FY13/14, Woobius focussed its research efforts on building the first web app for small-scale projects that would meet this need. In particular, the team aimed to develop a bespoke architecture in which the frontend and backend would be exchanging data regularly while the app was running to ensure that any user changes, such as updating a drawing or creating a new project folder, would be immediately reflected in the view for all users. To this end, the team planned to build a backend with the Ruby-on-Rails web framework and a MySQL database that would interact with a bespoke front-end built with the Adobe Flex app framework.

To ensure that data was shared quickly and efficiently between the front and backend, the team was forced to develop its own communications protocol. While off-the-shelf technology, such as RubyAMF, existed to allow a Ruby backend to share data with a Flex frontend, the team found that RubyAMF was not fast enough to ensure that data changes were immediately reflected in the GUI for all users. The team consequently felt compelled to create its own encoder that would convert data to the Action Message Format (AMF) necessary to share data with a Flex frontend.

To check for user changes, the team aimed to build its own synchronisation layer that would check regularly for changes to the database so that all other users could see immediately what had been changed. The team planned to engineer a solution in which the frontend would make requests every few seconds to the server for very small text files that would contain a timestamp of when the relevant project was last changed. If the timestamp changed, the frontend could then make changes to the project based on what parts of the project had been altered. The team had initially considered using off-the-shelf solutions from Adobe to manage these checks between server and frontend. However, the team was forced to build its own solution when it became clear that so many regular requests to the server from so many users would place too great demands on the server and hence would not scale.

The expected outcome of these technological innovations was a new software tool that would provide architects underserved by the software market with a bespoke, easy-to-use tool that would aid collaboration and make misunderstandings and costly mistakes among stakeholders much less likely.

Technological uncertainties and how they were overcome

One of the major selling points of the proposed tool was the promise that stakeholders on a project would always see the latest version of a project folder with there being no risk of one person’s overriding the changes of another. The consequent overriding uncertainty of the project was then how to guarantee that any changes made would immediately be reflected in the frontend for all users. This was challenging because it quickly became clear to the team that the off-the-shelf technology that promised to enable live updates of information was very slow and not scalable.

For instance, the team initially integrated the open-source RubyAMF library to convert Ruby objects representing project information into AMF data that could be rendered by the Flex frontend. The team quickly found that even for small projects the conversion of the project tree into AMF format was taking up to two seconds, which was intolerably slow and demanding on the servers. On examination of the RubyAMF source code, it quickly became clear that the library was simply inefficient and poorly designed. The team therefore set about designing its own AMF encoder from scratch, using a test-driven development methodology. Redesigning a popular open-source project from scratch was a highly non-trivial task that would have challenged any domain expert. The team consequently took as its guide the Python encoder PyAMF, whose test suite was extensive. On testing, the team found that its own encoder was more than ten times faster than RubyAMF.

Despite these dramatic improvements in performance, the team still found that encoding in some cases was too slow. On careful examination, it turned out that objects with many fields could simply not be encoded very quickly. The team consequently changed tack, creating its own custom string format which it then wrapped in an AMF message and sent to the frontend. This resulted in considerably better performance on objects with many fields. However, the team realised that it would be even better if a common string format was used since then it could take advantage of open-source libraries to parse data very quickly. JSON (Javascript Object Notation) was the obvious choice by this time. This again resulted in improved performance. But on reflection the team realised that wrapping JSON strings in AMF messages was actually redundant. JSON strings could simply be sent as responses to frontend requests via a RESTful API (Representational State Transfer). The added advantage of this approach, the team realised, was that such an API could interact with any kind of web client, not just an Adobe frontend, meaning, for instance, that the team could create a mobile app that could fetch data from the server via this API. The team consequently rewrote the APIs and on testing found that speed was twenty to thirty times better than at the beginning when the team was reliant on RubyAMF.

A similar weakness of out-of-the-box solutions confronted the team when it wanted to check the server regularly for changes to projects. The team initially tried to harness the built-in technology of Flex to run requests every few seconds to check for changes to projects. This immediately ran into performance issues. Responses to requests were often slow owing to database reads or because of background tasks running on the server at the same time. It was obvious to the team that this would only worsen as projects and the user base grew. Given the volume of requests expected, requests needed to be handled extremely quickly and not place demands on the server or the database.

On reflection, it occurred to the team that the nginx web server was able to serve small text files extremely quickly. What this meant was that all the team needed to do was store a timestamp of the last change to a project object in a publicly exposed text file in order to allow the frontend to check for changes to projects very quickly. Many web clients could request this text file every few seconds and the effect on server performance would be minimal. The team only had to ensure that this timestamp was updated quickly in response to changes. The web client could then poll the server every few seconds, check the timestamp and if it had changed update the frontend to reflect any changes. This in turn compelled the team to build a dependency framework for the frontend so that, for any change in the timestamp of a project, dependencies among objects could be resolved and changes propagated and reflected in the interface.

This left only an issue with data transfer. At the beginning in response to requests from the frontend, the server had been sending entire projects with all their files and comments in response. For large projects, with many files, companies and folders this would inevitably lead to performance issues. To tackle this issue, the team decided to partition projects into two types of folder, ‘dropbox folders’ and ‘vault folders’. Under this arrangement, when the client requested the root project object (which could encompass thousands of objects) the server would only return the folder structure. The client could then request in turn each of these folders. The outcome of this partition was that any one request would at most return a few hundred objects, even if the relevant project had many companies and folders. This would not cause any major performance issues.

By the end of the work, the team had a working tool that would make collaboration between architects on construction projects easier and much less prone to error. The team knows of no comparable tool specifically for architects available on the market.

Some comments on the above

It’s worth noting what’s different between this and the technical data collection, what’s not, and what matters or does not matter in the translation.

The first obvious difference is that the technical narrative makes copious use of HMRC jargon, and rephrases things so that they may be understandable by someone who is not familiar with software development (which is the case of the vast majority of HMRC inspectors).

So – the above is how to write a kick-ass narrative, but does my project qualify, I hear you ask? Come this way to find out …

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R&D Tax Credits Technical Narrative: The essential first step

Before you can actually write a technical narrative, you need to know what to write about. And if the technical data you’re working from isn’t great, your technical narrative will also suffer (and perhaps attract an HMRC enquiry). Garbage in, garbage out.

So, to increase the quality of your technical data, and minimise the garbage-factor, you need to know how to construct your narrative in the most HMRC-friendly way to maximise your chances of reclaiming R&D Tax Credits, and this post will explain exactly how to do just that.

Questions, questions, questions: what to answer and how to answer them.

Whether doing the technical data collection in person or via email, it’s good to generally focus on the following key questions for each project. A sample data collection form is included further down.

Name of the project

It’s obviously useful to have a name to refer to the project by, whether it is “Microsoft Outlook PGP Support” or some sort of code name.

When did the work start and finish?

As covered earlier, projects need to be delivering new stuff every financial year. Asking this question:

makes it possible to check that the project qualifies in terms of when the work was performed;

can be used to justify why the project was included in case HMRC challenges this;

helps the writer determine how much time to spend on the project (if a project ended 2 months into the period, and was covered in the previous claim, it probably doesn’t need that much new detail).

Rough (month) dates are of course ok for this question.

What is your project? What are its capabilities, summarised?

The point in this section is to help HMRC understand what the project was about, in brief, to put the rest of the technical data in context. It should not be very long (a couple of paragraphs are enough), but it should be clear. It may include a brief mention of the competitive landscape that made the project necessary.

As an engineer, can you describe the design, execution or production challenges that you faced?

What HMRC will be looking for are actual design challenges instead of process problems. They are looking to hear about algorithms not meetings discussing algorithms. They don’t want to get into the details of the solution just yet, just outlining what the problem was in detail.

What platforms and tools did you use to make it?

This section is also useful for the writer to put things in context, and can make it easier for the HMRC to dig deeper into your project if necessary. In this section you should be name-dropping languages, frameworks and components.

What was created/implemented to overcome the technical challenges you faced? Are there any hacks you're proud of?

This is where you really need to go into full detail about things that were tried to overcome the problem. You should also be sure to include details of attempts that failed, as evidence that the first few attempts to solve a problem failed for technical reasons are highly indicative of technical uncertainty, and HMRC specifically looks for these.

If you get any ideas about feats of technical brilliance (or even just clever hacks) that don’t really relate to the specific challenge you were covering, include them anyway. It’s best to err on the side of too much than too little.

What is the market position of your product/project?

More specifically can you please explain how it functionally differs from other competitors in the same class? What improvements and enhancements have you made to improve your competitiveness? This is helpful to the writer because it can help to present a case for why the company is innovative, based on comparison with its competitors.

Final tips about the technical data collection

If the tech data collection is done well, it enables the efficient use of external writers like the ones provided by GrantTree. If you just can’t find the time to fill in this data, we can come in and have a meeting to do it in person, and this in-person model (which we often call a “123 meeting” and at which we usually collect both technical and financial data) is highly effective for larger organisations where it can be difficult to prioritise the tech data collection work otherwise.

One advantage of separating tech data collection and writing of the technical narrative is that it enables the technical person providing the data to be very efficient. They just need to be in the frame of mind and spend 30-60 minutes bashing out everything they can think of about what went wrong in the project from a technical standpoint. A competent technical writer can then take this data and turn it into a clear technical narrative that conveys the advances in a way that HMRC inspectors who are not specialists in the field can understand.

This compares favourably to the option where the same person who has the tech data writes the technical narrative - because often, their time is much too valuable to spend it learning how to write technical narratives, and so it is more efficient to keep their time involvement to a minimum.

Sample Technical Data form:

Name of the project: Woobius - API serialisation layer

When did the work start and finish? January 2007 - October 2008

What is your project? What are its capabilities, summarised?

Woobius is split into a Flash/Flex application at the front-end (which deals with interactions with the user, display of information, etc) and a Ruby on Rails application at the backend (which implements a lot of the business logic and stores data). In order to communicate, those two layers have to exchange a lot of data whilst the application is running, about the state, metadata and contents of the projects, folders and drawings which the user is interacting with, and about updates made by other users to those same items.

As an engineer, can you describe the design, execution or production challenges that you faced?

There were several kinds of technical challenges that impacted us here.

The first was around the communications protocol being used to transfer the information. At first we used the industry standard for Flex application communications protocols, RubyAMF. Then our own custom-built encoder. Then we switched to using text encoded strings wrapped in AMF messages. Finally we moved to building what was becoming, by then, the industry standard, a RESTful JSON api. Each of those options had its own tradeoffs and was a result of the things we learned through trial and error in the previous steps. The primary concern, and primary difficulty, was performance, and each successive version improved the performance substantially

The second was around the live update of the information. In a multi-user system, it is important to show users only the latest version, and to reflect changes made by other users very rapidly, and to prevent one user overwriting the changes of another. This is particularly important in a system which includes as a selling point that it will reduce such communications errors and provide an accurate, ordered audit trail that can protect construction project participants from litigation.

The third challenge was around the size of the information and how to partition it. A single construction project can be very substantial, as it will typically involve 20 or more companies collaborating together, and each can have a whole substructure of folders (say, on average, 20-50 subfolders), each containing bunches of files. In addition, each will have any number of issues in the “vault”, which typically can number the 50+ range, each containing several dozen, or, in some cases, hundreds of files. In short, a single project can be comprised of upwards of 20 thousand objects. Constantly reloading this entire tree of data is not practical even on very good connections.

What platforms and tools did you use to make it?

Our full development stack was involved in this project, all the way from loading records from MySQL, to handling them in Ruby & Ruby on Rails, serialising them with RubyAMF and other technologies, caching with Redis and then simple text files, serving files lightning-fast with Nginx, receiving data in Flash/Flex and decoding it with ActionScript, and even integration with Javascript/jQuery to pipe data around various parts of the application.

What was created/implemented to overcome the technical challenges you faced? Are there any hacks you’re proud of?

Where to start!

Let’s begin with the first one, the communications protocol. The industry standard for Flash applications is a protocol called AMF, which stands for ActionMessageFormat. It is widely supported by Adobe technologies, both server-side and client-side, and it is the recommended way to communicate with Flash applications. Since Flex is built on Flash, this naturally meant our Woobius Flex client should use AMF to communicate. The only available library to do this in Ruby at the time was RubyAMF.

The problems began when we were trying to fix performance problems in sending the whole project (before we partitioned it in different chunks) and we figured out that even a relatively small project with a handful of companies, folders and files was taking about 2 seconds to render - that is, the main delay in sending the project tree to the client was the rendering in RubyAMF. After a close examination of the open-source code in RubyAMF we determined that its approach to rendering was horrendously inefficient. First, we tried making changes to RubyAMF itself, and did get some performance improvements out of that, but eventually we realised that RubyAMF’s encoder was just very slow because of how it was designed, and so we began the work of re-building RubyAMF’s encoder from scratch. This one was fully tested (unlike RubyAMF’s), and built with performance in mind. We took a lot of inspiration from the Python equivalent project (called PyAMF), and from chatting to its creators. PyAMF was built for speed and vastly more efficient than RubyAMF, but written in Python. Using the test suite that the PyAMF team had built, we were able to build a solid, spec-compliant and extremely fast AMF encoder in Ruby (it was more than 10x faster than RubyAMF’s in most of our tests). This was a completely new encoder, much faster than anything available in the Ruby world.

However, even having followed this path, we found that the performance was still lacking. On a hunch, we tried rendering different things through the encoder to see what it struggled with, and found that encoding binary, fragmented Ruby objects made of lots of different fields was the key issue. Encoding a single string, no matter how long, was very quick. We converted one of the key requests to using a custom text format wrapped in an AMF message, and found that this was considerably faster than proper AMF objects, and could be easily decoded on the other end.

Next, we soon realised that having a custom format made things harder on both the encoding and decoding end - better to use something standard like JSON, which was starting to take hold as the de facto text encoding format for data (above XML or YAML). This had the benefit that there were standard (and fast) encoders and decoders available in both Flash/Flex and Ruby/Rails. So we then proceeded to convert the application to using JSON wrapped in AMF messages.

Next, as we began to hit against limitations of the Flex framework itself, and to consider a shift towards a more RESTful application architecture (and in fact to design new parts of the application using this model), we realised that the AMF wrapper was unnecessary, so we removed that and rebuilt the APIs once again as plain old Rails RESTful requests.

Altogether these steps resulted in about 20-30x improvement in performance compared to the initial model of using RubyAMF to send properly formatted AMF messages, and vastly enhanced the APIs to make them more future-proof and more easily interoperable with a variety of clients. This feature ended up being actively used when we built an iOS app for Woobius.

For the live update feature, we once again first considered using Adobe’s recommended technologies to handle the communications, but found several scalability issues in this step which needed to be executed many times per minute across every single user:

each request took too long as it needed to check the database to see if the object had been updated;

the requests also took too long to be encoded and decoded; we needed this to be snappy and very light on the server;

occasional, random server delays due to other big jobs running at the same time would cause delays in the response and wreak havoc on the synchronisation of data.

These issues were amplified by the fact that Woobius was, at the time, running on an operational environment that was very constrained in terms of memory available, so having lots of small requests frequently hitting the server caused all sorts of production issues.

To solve this, we made use of one of Nginx’s less used features, which is its ability to be insanely fast at serving small files directly, coupled with the ability to transparently expose Ruby on Rails public folders via Nginx. We then stored a timestamp of the latest update to the relevant object, within a plain text file within a publicly exposed folder. Each file was labelled by the folder (for the object type) and id of the object, e.g. woobius.com/flags/projects/123.txt would contain the timestamp for project id 123. This flag file was then very rapidly updated whenever a change was made to the project object or to any of its child objects. The Flex client could then limit itself to using polling to check whether the flag had changed, every 5 seconds or so, and update the interface immediately if the flag was different from what it thought it should be.

This of course had some knock-on effects, like requiring us to build an internal framework to track when objects changed and what the dependencies between those objects was, or, indeed, doing the same thing on the front-end to correctly decide what to update when a timestamp changed, or when several timestamps changed at the same time.

There were numerous other edge cases in this attempt at building a synchronisation layer, but in general this approach worked as a whole and scaled up well.

The partitioning problem was closely related to the construction of the dependency tracking layer. We found that the best way to split the project tree was into projects, “dropbox folders” (unrelated to the file sharing product with the same name!), and “vault folders”. Retrieving the root project object provides the folder structure, and each folder provides a fresh copy of itself and all the files it contains. This way each request would only return, at most, for a very large conglomerate of objects (e.g. a project with many companies or a folder with many files and comments), a few hundred objects, which while large, was manageable from a performance standpoint. Of course, making this work also required the dependency tracking framework on the frontend.

What is the market position of your product/project?

When we began to build Woobius, there were other project collaboration tools for the construction industry, but they were entirely focused on enabling contractors to track and manage large projects. There was nothing designed for speed and ease of use by architects, which was the market we decided to approach. Other tools that focused on contractors included 4projects, BIW and Asite.

Some comments about this sample answer

This sample answer is very long and very clearly articulated. Yours doesn’t have to be so long nor so clear. It is also already very neatly packaged, and almost directly usable as-is when putting together the technical narrative. This is likely because the person who wrote it has experience of writing many claims and so knows how to present data very clearly!

You don’t have to write such a long answer, nor such a detailed answer, but the key thing to take away is the fact that this is written by a developer, for a developer, and going very deep into practical, technical concepts. If the technical jargon isn’t there, it is very difficult for the writer to do their job.

Next up: how to write a kick-ass technical narrative!

[granttree]

Energy Catalyst Round 4 announced

The new financial year sees a new call from Innovate UK for applications to round 4 of the Energy Catalyst. In a change from previous rounds, all three streams are open at once with registration closing on 8 June and applications due by 14 September.

Co-financed by Innovate UK, EPSRC, DECC and, from this year DFID, the competition will support projects that are at their early, mid or late stages of development. All three streams will support projects that innovatively address all aspects of the energy trilemma; low carbon, security of supply and affordability. With DFID joining the funding consortium, applications are now encouraged that will transform energy access in developing countries too, especially across Sub-Saharan Africa and South-Asia.

Projects should be focused on the development of:

new technologies

enhancement or alternative applications of existing technologies

development of components, subsystems or systems

integrated whole-system approaches

enabling technologies for the energy system

Winning proposals will bring innovative new solutions to the energy sector and its supply chain. Innovate UK also encourages cross-cutting and enabling technologies which can apply across a range of sectors. For example, high-value manufacturing, advanced materials, sensors and information and communication technologies (ICT).

The technology areas that are in scope are wide reaching and include; carbon abatement, renewables, nuclear fission, hydrogen and fuel cells, energy networks and system integration, demand side technologies as well as a wide range of enabling technologies and processes.

Early stage awards offer up to £200k for either individual SMEs or SME led partnerships for a project lasting up to a year. Funding will support projects that explore and test the technical potential of an innovative idea or concept. They do this through technical feasibility studies. The aim is to find out if a pre-industrial concept is ready for further technology development. Up to 70% of project costs are eligible.

Mid stage awards offer up to £1.5m for a business led partnership to deliver a project lasting up to 3 years. Funding will support projects that take innovative ideas through to the technology development stage. They do this by carrying out industrial research and development. This can include laboratory studies and component or system development and testing. It can also include verification and evaluation in simulated environments. Up to 70% of project costs are eligible for SMEs.

Late stage awards offer up to £10m for a business-led partnership, which can include overseas partners, lasting up to three years. Funding will support projects that prove and assess the capability and performance of innovative technologies. They do this through pre-commercial technology validation. This can include prototype and pilot testing and field trials. This takes place at the component and system levels in realistic operating environments.

To find out more about the funding and how GrantTree can help with all aspects of developing a project from business-case development and project planning, to consortium building, please get in touch with one of our grant consultants.