As a corporate finance professional or M&A adviser, you rely on a select group of trusted specialists to support your work. These specialisms help you to support your clients when they are preparing to sell their business.
There’s every chance that you don’t currently have an R&D tax relief specialist you can count on. You may have had a bad experience with the R&D tax market, or not even be aware of the support that a trusted R&D tax specialist could offer to support with the M&A process. R&D tax credits are often overlooked in the sale process, and have historically been considered a low-risk area for due diligence purposes. But the R&D tax landscape has changed substantially and R&D tax relief can be an important financial consideration during any transaction, as well as post-transaction. R&D tax relief positively impacts the value of a company and could even be a deal-breaker.
At ForrestBrown, we provide valuable R&D tax consultancy to help businesses consider and maximise their R&D position when it comes to selling. R&D tax relief is all we do and we are unmatched in our specialist technical expertise. This allows us to mitigate risk, and unlock, drive and preserve value in the M&A process and beyond.
In this article, we’ll explore the value of taking R&D tax relief seriously when it comes to selling your business.
R&D tax relief and M&A
There are three principal areas where ForrestBrown can add value to the M&A process:
1. Due diligence and M&A
As you help a client to ready a business for sale, part of your job is to identify and mitigate risk. Our research shows that many business owners aren’t aware that R&D tax relief is an area of considerable risk. Just because an R&D tax claim has been paid does not mean it has been approved by HMRC – in reality, there’s every chance that HMRC hasn’t reviewed the submitted claim(s) at all.
In recent years, HMRC has significantly changed its approach to R&D tax, bringing increased scrutiny to more R&D claims than ever before. There is also a proliferation of spurious advisers operating in the R&D tax market, meaning more businesses than ever are falling foul of poor or fraudulent R&D tax advice. This means that there may be unidentified risks lurking within current and historical R&D tax relief figures.
Feedback we’ve received from the M&A market suggests that the increased risk of HMRC scrutiny is not something well covered in existing due diligence processes.
If your client’s R&D claim isn’t robust or well supported, there is an increased risk of HMRC opening an enquiry. And whilst one year’s R&D figures may not be material to a transaction, if HMRC finds errors, it could carry out a discovery assessment which puts previous claims at risk. Discovery assessments can look back at four, six or even 20 years of claims. In most cases, these figures would be material, and could be used by buyers to drive down the transaction value or pass on the purchase altogether. For example, an R&D tax relief claim of £250,000 for one year might not appear material when compared to total transaction value, but if there are problems with that claim that open up six years of relief, there could be £1.5m of funding already received at stake.
Get an overview of how and why HMRC has changed its approach to R&D tax relief.Read more
ForrestBrown’s due diligence service
Our specialist expertise and insight on HMRC’s changing approach means we deliver actionable recommendations based on structured analysis and best practice. At ForrestBrown, we match our service to your needs and situation at that time. The earlier we can be involved in the process the better, but we will always aim to add value at any point in the M&A process through practical advice and actionable recommendations.
ForrestBrown’s expert team can:
- Look back over previous R&D claims and present an accurate assessment of risk.
- Review R&D projects to provide assurance that they meet the relevant criteria and review the claim methodology for apportioning expenditure.
- Identify any areas of the claim that could be subject to challenge by HMRC during an enquiry, advise on the nature of those challenges and what evidence could be gathered to support the claims.
- Diligently review (and, if needed, update) claim documentation to ensure that R&D projects and expenditure have been clearly explained to HMRC, should the claims be reviewed.
- Advise on appropriate disclosures to protect against potential discovery assessments.
2. Transaction values
R&D claims can impact transaction values significantly. When it comes to due diligence and risk, not being on top of your R&D figures could drive down value. Conversely, robust R&D claims can increase value and attractiveness to buyers. Businesses that invest in R&D are statistically more likely to be successful, have strong staff engagement and higher growth potential. And being on top of R&D tax relief compliance reflects well on wider business processes and investment decision-making.
With our help you can leverage your client’s previous R&D claims and latent R&D during the merger and acquisition process. We can help to ensure that all qualifying R&D activities and expenditure have been identified clearly and correctly, demonstrating the wider value of your R&D strategy. We can also use our considerable cross-sector experience and data to benchmark and forecast future value.
How ForrestBrown supports transaction value
Our specialist expertise can help increase the transaction value. It is always more beneficial to start this process as early as possible and well ahead of a transaction.
- Identify missed opportunities – by potentially spotting unclaimed or latent R&D you can increase the value of the sale. Where there is scope to, increasing previous claims can also bring additional cash into the business that the buyer will be expected to pay for.
- Forecast the availability of R&D relief in future periods, giving you the ability to model future value based on previous R&D claims and the impact of the transaction. R&D tax relief can be complex to accurately forecast because the value of a claim does not only depend on your proposed investment in R&D, but can be impacted by your business performance and wider tax affairs.
- Demonstrate how much R&D is locked into your client’s business for the current period, as well as what latent R&D exists that will be relevant going forward. This indicative estimate of future potential claim value is particularly relevant when there is a change of incentive because of the transaction.
- When financial years and transaction timelines don’t align, we can ensure you stay ahead of what this means for the R&D tax relief due and help with estimating potential value.
- Our work can provide protection in negotiations, helping counter any assertions from buyers regarding the value of R&D in the business.
Transaction structures & post-sale implications
R&D tax relief comprises two different incentives: the SME R&D tax credit and the Research and Development Expenditure Credit (RDEC), designed for larger businesses.
An M&A transaction can result in a company changing status and therefore moving from the SME incentive to RDEC – this significantly impacts future R&D tax relief claims.
Switching between the two incentives affects the overall benefit received. Moving from SME to RDEC changes the rate of relief as well as the types of expenditure you can include in a claim. The status of the entities involved in the transaction and the timing of the transaction compared to the accounting periods of the entities can all also affect the relief available.
RDEC can be recognised above-the-line in the income statement, which positively impacts profitability. The SME R&D tax credit cannot be recognised in this way, therefore a switch between schemes can have a material impact on how R&D claims are presented in statutory accounts. Any post-sale targets linked to profitability would therefore be impacted by such a switch, with a potential knock-on effect on earn-out agreements.
If R&D tax relief figures are material, transaction structures and timings benefit from careful consideration, to avoid surprises post-transaction. The ForrestBrown team can review the status of all relevant entities and provide a complete understanding of how and when the transaction will impact R&D tax relief claims on both sides.
3. ForrestBrown’s service around transaction structures
Both buyer and seller benefit from a complete understanding of how the SME and RDEC incentives work – and what happens when businesses move between them.
- Share full implications of the transaction structure on future operational expenditure and R&D claims.
- Highlight the impact for shareholders of a change in company status e.g. potential impact on earn-out contractual provisions.
For example, ForrestBrown has advised on the impact that transitioning from SME to RDEC will have on the operating profit of the company, and how that will impact the earn-out structure. The understanding of the impact has helped the seller to decide how to approach this aspect as part of the negotiation of the deal.
Let ForrestBrown support you during the M&A process
Speak to us today to understand more about what we can bring to the M&A process. At ForrestBrown, we’re passionate about R&D tax relief and work closely with our partners to understand their client’s ambitions and provide informed advice. It’s worth making sure your client’s R&D position is a real strength when preparing for your next sale.