20161215_innovation_lifecyle_funding_derek_henry_andrew_bourg_bdo
TRANSCRIPT
Innovation Lifecycle Funding
Derek Henry & Andrew Bourg
15 December 2016
2
Derek Henry
Tax Partner and Head of R&D Tax Services
Andrew Bourg
Partner- Corporate Investment and Business
Advisory
INTRODUCTION
Innovative Tax Incentives
EIIS PP EIIS Fund
ENTREPRENEUR/
RETIREMENT
RELIEFSTART UP EXEMPTION
SURE
TAX SUPPORTS AND THE CAPITAL LIFECYCLE
R&D
KDB
&
S.291 A
Focus of Presentation
R&D Success KDB
Research and Development Tax Credits –
Incentives for Innovation
BENEFITS
25%
12.5%
Effective tax saving of 37.5%
EXAMPLE CALCULATION
31 December 2015
Qualifying R&D Expenditure
€400,000
Credit @ 25%
= €100,000
USING THE CREDIT
Year Year 1 Year 2 Year 3
Prior year CT Current year CT
- Year 1 excess
Year 2 CT Year 3 CT
Year 1 excess
33.5%
Balance Refunded50% Refund
67% Balance
33% Refund
Year 1 excessYear 1 excess
R&D KEY EMPLOYEE
TWO TESTS
SCIENCE TEST
Qualifying Activity
Sci/Tech Uncertainty
Sci/Tech Advancement
Systematic
Investigative
Experimental
Field of Science
Basic Research Applied Research
Experimental Development
SCIENCE TEST
Types of Activities
SCIENCE TEST
In a Field of Science
1. Natural Sciences
2. Engineering and Technology
3. Medical Sciences
4. Agricultural Sciences
SCIENCE TEST
SYSTEMATIC, INVESTIGATIVE AND EXPERIMENTAL ACTIVITIES
1 • Planned
2 • Logical Sequence
3 • Records
4 • Dated
5 • Evidence of Activities
6
• Measures of Scientific/Technical Properties
SCIENCE TEST
Advancement
Existing
Technology
Base
SCIENCE TEST
Uncertainty
Can?
How?
Page 18
R&D Process (generally)
Routine Process (generally)
Page 19
R&D Process (generally)
Information focus should
be placed here!
UNCERTAINTY IN PRACTICE
R&D – FOOTPRINT REDUCTION
‘divide by’ and implement
R&D
POTENTIAL R&D – COMPUTER SCIENCE
NON-R&D – COMPUTER SCIENCE
ACCOUNTING TEST
Allocations
Records
Commencement and Termination
Project plan
Personnel
QUALIFYING COSTS
“The tax credit will be available in respect of expenditure incurred –
• In the carrying on
• By it
of research and development activities….”
Revenue
Capital
Plant and Machinery
Sub contracted activities (limited) –concessionary treatment
Interest not allowed
EXPENDITURE ON BUILDINGS AND STRUCTURES
35% of building must be used for R&D for 4 years
Clawback period 10 years
DOCUMENTATION
CLAIMS PROCESS
REVENUE REVIEW
COMMON MISTAKES
DocumentationQualifying Activity
Complete R&D
Claim
Qualifying Claim
Revenue Review
Tax Return
Qualifying Costs
Knowledge Development Box
DEREK HENRY
15 December 2016
BUDGET 2015
WHAT IT IS TO BE?
COMPLIANT
Non- Compliant
R&D
IP
Patent
Box
Low tax
COUNTRY A COUNTRY B
Compliant
R&D
IP
Knowledge
Development
Box
PUBLIC CONSULTATION
January 2015
FEEDBACK STATEMENT
July 2015
What is the relief?
Summary of Relief
Carry on R&D
Resulting in Qualifying Asset
Trading Income from Qualifying Asset
KDB Allowance
Corporation Tax on Profits 6.25%
Legislation
KDB Section 769G– Section 769R TCA 1997
• Section 32 Finance Act 2015
• Effective 1 January 2016
KDB ( Certificate of Inventions) Bill 2016
• Still Draft
New Patent Act re Examinations
What’s in the box?
KDB
2. Qualifying
Assets
4. Specified
Trade
5. Calculation of
Profits
6. KDB
Allowance
7. Tracking and
Tracing
1. Qualifying
Expenditure on
R&D activities
3. Qualifying
Income
What’s in the box?
Qualifying Patent cont’d
Registration versus substantive examination
Patent Granted Required System
Pre 1 January 2016 Registration if full
search carried out by
Patent Office
1 January 2016 – 31
December 2016
Registration if full
search carried out by
Patent Office
Patent Agent Cert
Post 1 January 2017 Substantive
Examination
Not A Qualifying Asset
Short-term Patents
Petty-patents
Utility models
Marketing Related IP
Computer Program
In section 769G(1) the definition of intellectual property, for the purposes of the KDB,
includes:
(a) a computer program, within the meaning of the Copyright and Related Rights Act
2000, but, where a computer program is a derivative work or adaptation, the portion
of
the computer program that represents the derivative work or the adaptation of the
original work and the original work shall be treated as two separate computer
programs,
Section (2) Copyright and Related Rights Act 2000 defines a computer program as:
…a program which is original in that it is the author's own intellectual creation and
includes any design materials used for the preparation of the program
IP for SMEs the 3rd Category
…inventions that are certified by the Controller of Patents, Designs and Trade
Marks as being novel, non-obvious and useful;
New Legislation
• Knowledge Development Box (Certificate of Inventions) Bill 2016
SME Definition
IP T/O < €7.5m (12 months)
Group T/O < €50m and
Micro, small or medium
Family of Products
• No. of Qualifying Assets
• Interlinked
• Reasonable to conclude not possible to id overall expenditure or income from
each QA
• Family of Assets = smallest grouping that can be identified
Family of Assets Example
• Family of assets based on sales (TV)
• Family of assets based on R&D (IT)
IP location
R&DLegal title
IP
Other Country
IP Held
Beneficial
Interest
Income
Qualifying Expenditure
Uplift Expenditure
Profits of Specified
Trade
Qualifying Profits
Overall
Expenditure
Modified Nexus Formula
managing, developing, maintaining,
protecting, enhancing or exploiting …
the researching, planning, … other similar
activity leading to ...
Sale of goods
or services
deriving
value…
•Direct income
•Embedded Royalty
Overall Income from
QA
Overall Income from
QA
Expense and Capital
Allowances of Specified Trade
•Just and reasonable allocation
Qualifying Profits
Modified Nexus Formula
Qualifying Expenditure
Uplift Expenditure
Profits of Specified
Trade
Qualifying Profits
Overall Expenditure
R&D Expenditure
• Creation
• Development or
improvement
• 3rd Party outsourcing
Acquisition cost &
related party
outsourcing
• 30% of QE
or
• acquisition costs &
group outsourcing
All of above plus
• total acquisition cost,
• total Group outsourcing
• other Non-Qualifying expenditure
The Relief
After capital
allowances,
before losses
INTERACTION WITH OTHER TAX RELIEFS
Section 766 TCA 1997
Tax Credit for Research and Development Expenditure
Section 291A TCA 1997Intangible Assets
Loss relief
Double Tax Relief
Collaborative Research
Knowledge Transfer Ireland
•Wholly industry-funded
•Partially industry-funded
•Assignment of Foreground IP
•Assignment of Non-several IP
•Licence of Foreground IP
•RPO Background IP
Enterprise Ireland’s Technology Centres
• Incurred by company in carrying out R&D = QE
•MV of licence payments = Acquisition costs
Documentation
Section 769L
• Have available all such records as may reasonably be required
• Records to cover tracking of:- Overall income
- Qualifying expenditure and
- Overall expenditure,
in relation to qualifying assets
• Family of assets - Commonality of science
- Consistency of methodology
- Nexus between expenditure and family of assets or
- Choice of family which creates the nexus
• Derivations
• Retain for 6 years after last year of claim
Sample Computation
KDB Co develops and sell a smart
TV. Within the TV is a computer
program which was developed a
number of years ago at the below
cost. It is estimated that this
program represent 20% of the
sales value of the TV.
Cost type €000
In house R&D 2,500
Purchased IP 500
Group outsourcing
cost
400
In the year ended 31 December 2016, KDB
company had the following results:
€000
Sales 10,000
Cost of Sales 3,000
Gross Profit 7,000
Administration 1,500
Net Profit 5,500
Sample Computation
Step 1- Work out specified trading profits
€000Specified
Trade
General
Trade
Sales 10,000 2,000 8,000
Cost of Sales 3,000 600 2,400
Gross Profit 7,000 1,400 5,600
Administration 1,500 300 1,200
Net Profit 5,500 1,100 4,400
Sample Computation
Step 2- Apply modified nexus formula to determine Qualifying Profits
Qualifying Expenditure
Uplift Expenditure
Profits of Specified
Trade
Qualifying Profits [QA]
Overall Expenditure
QE= €2,500,000
UE= €400,000 + €500,000 = €900,000
or €750,000
OE= €2,500,000 + €400,000 + €500,000 =
€3,400,000
Specified trade profits = €1,100,000
QA= (€2.5m+€0.75m)/€3.4m x €1.1m =
€1,051,470
Sample Computation
Step 3- Work out KDB allowance
• 50% of qualifying profits
• €1,051,470 * 50% = €525,735
Sample Computation
Step 4 - Complete Tax Computation
Specified
Trade
General
TradeTotal
Profits per
accounts 1,100,000 4,400,000
KDB allowance525,735 -
Taxable
profits 574,265 4,400,000
Tax at 12.5%71,783 550,000 621,783
Proof Taxable Tax
Taxable
profits1,100,000
6.25% 1,051,470 65,717
12.50% 161,766 20,221
12.50% 4,400,000 550,000
621,783
Transitional Measures
1 January 2016- 31 December 2019
• Acquisition costs pre 1 January 2016
• Group outsourcing pre 1 January 2016
• QE on QA = QE in the last 48 months
After 1 January 2020
• Acquisition costs pre 1 January 2016
• Group outsourcing pre 1 January 2016
• No QE on QA incurred pre 1 January 2016
Time Limits
24 Months
SMEs
• 10% Notional Royalty
• 3rd Category of Asset
• Documentation
Case Study
Case Study
ICT Limited
Trading for 5 years in high end software development/platform design.
The company has decided to develop a completely new payments platform, which is
compatible with internal legacy systems, cross browser compatible and provides high
processing efficiency (i.e. fast processing speed and high scalability).
It believes the development of this new platform will drive its business in the current
market.
ICT Limited has prepared a detailed business plan which is included below. It is
anticipated that the project will create 5 new jobs during the development phase.
The result of the R&D will be copyright software.
Case Study
Business plan
Year
R&D
expenditure
IP acquisition
costs Other costs Total Costs
Expected
Revenue
Gross Funding
Requirement Cumlative
1 650,000 100,000 50,000 800,000 0 800,000 800,000
2 200,000 150,000 350,000 -200,000 150,000 950,000
3 50,000 200,000 250,000 -500,000 -250,000 700,000
4 25,000 250,000 275,000 -1,000,000 -725,000 -25,000
5 25,000 250,000 275,000 -2,500,000 -2,225,000 -2,250,000
6 25,000 250,000 275,000 -2,750,000 -2,475,000 -4,725,000
975,000 100,000 1,150,000 2,225,000 -6,950,000 -4,725,000 -9,450,000
Case StudyStep 1
Work out Net funding requirement
R&D costs 975,000
EI R&D Grant -50,000
R&D tax credit -231,250
Real cost of R&D 693,750
IP Acquisition costs 100,000
100,000
Other costs 1,150,000
EI Feasibility Grant -25,000
1,125,000
Net Funding Requirement 1,918,750
Tax credits etc. need to be calculated annually. For illustrative purposes we have ignored this and
the implications of same.
Case StudyStep 2
Work out after Tax Repayment Capacity
Modified Nexus
Total Income -6,950,000
Total Expense 2,225,000 Specified profits (SP) -4,725,000
Net Profit -4,725,000 QE 975,000
OE 1,275,000
Addback Acq costs -100,000 UE 0
S 291A SIA 100,000
QA= SP x
(QE+UE)/OE -3,613,235
Taxable profits -4,725,000 KDB Allowance
50% of QA 1,806,618
KDB Allowance 1,806,618
Net Taxable profits -2,918,382
Tax at 12.5% 364,798
Net repayment capacity €4,360,202
Case Study
Tax Measures Effects
Reduction in funding requirement 231,250
Reduction in tax liability
S 291A 100,000
KDB 1,806,618
1,906,618
At 12.5% 238,327
Tax effect of Innovation Tax Measures 469,577
FUNDING OPTIONS
PRESENTATION TO
IRISH SOFTWARE INNOVATION
NETWORK
Andrew Bourg15th December 2015
OVERVIEW OF FUNDING MARKET
Currently manage the following Funds:
The BDO Development Capital Fund; and
Davy EIIS Fund.
Andrew Bourg
Investment Director
OVERVIEW OF FUNDING MARKET
1. Funding landscape
2. Financing options available
3. Accessing Funds
CHANGING FUNDING MARKET
What’s driving the change?
Irish SMEs reliant on banks
Disproportionately exposed to potential weaknesses in
the banking sector
Demand for alternative sources of Funding
SME growth increasing demand
SME Funding Requirement
Market Sentiment SMEs ICT Sector
Optimistic about the prospects for
their businesses in the coming year
82% 81%
Expecting revenue growth 85% 94%
Plan to hire more staff 60% 75%
Expect increase in growth in capital
/ R&D spend
51% 67%
GOVERNMENT
VENTURE CAPITAL
DEVELOPMENT
CAPITAL
EIIS & HNWI
PRIVATE EQUITY
SEED CAPITAL
LOAN GUARANTEE
SCHEME
TRADITIONAL
COMMERCIAL
FINANCE
SBCI
CREDIT FUNDS
EQUITY DEBT
NPRF / ISIF
ENTERPRISE IRELAND
R&D GRANTS
MICROFINANCE
IRELAND
COUNTY &
ENTERPRISE
BOARDS
FUNDING SOURCES
Bank Funding
• BOI - €12 billion to SMEs over the next 5 years
• AIB - Range of dedicated SME funds launched
over last 2 years
• Ulster Bank now “core” to RBS Group
• Strategic Banking Corporation of Ireland (“SBCI”)
What will SBCI do for SMEs?
• Lower cost of funding
• Provide loans of longer term
• More appropriate T&Cs
• Promote greater competition
IN SUMMARY – DEBT PROVIDERS
• Over reliance on Banks
• Re-capitalised & investment
• Key role
• Alternative funding sources
Size Fund Manager Investment/
Loan Amt
E350m
EQUITY/DEVELOPMENT CAPITAL FUNDS
Focus
SME Credit Fund
SME Equity Fund Carlyle Capital
E450m BlueBay Capital E5m-E45m Mid-Large Co’s
E2m-E50m
BDO Development Capital Fund
Development
CapitalE2m-E10mMid-Size Co’s
Mid-Large Co’s
E75m
MML E2m-E10mMid-Size Co’s E125mGrowth Capital Ireland Fund
NPRF BACKED GROWTH FUNDS
ENTERPRISE IRELAND BACKED
GROWTH FUNDS
Market Opportunity
Clear Strategy
Effective Management
Strong Governance
Risks Identified
Financial Model
Commercial risk adjusted
Return
What are funding providers
looking for?
Requirements for raising finance?
Typical requirements:
– Business plan / information memorandum
– Financial projections/assumptions
– Management team overview
Dealing with private equity providers:
Overview of the process
Prepare an information
memorandum
Contact private equity
providers / Teaser
Present
Receive
offers
Negotiate and
second round offers
Accept offer
Due diligence
Final negotiatio
ns and deal close
• RAISE FUNDS IN
ADVANCE
• AVOID SHORT TERM
FINANCING PRESSURES
• ENSURE YOU MATCH
FUNDING TO FUNDER
• SUSTAINABLE CAPITAL
STRUCTURE
• DEVELOP ROBUST
FINANCIAL PLAN & BE
REALISTIC
• DISCUSS IN DETAIL WITH
ADVISER IN ADVANCE
Key Challenges - & how to
overcome them?
ACCESSING
FINANCE
IDENTIFY RISKS
SLOW PROCESS
POOR
PREPARATION &
INFORMATION
IDENTIFY TYPE
FUNDING• IDENTIFY KEY
TRADING RISKS
• SHOW WHAT
ACTIONS COMPLETED
TO MITIGATE
PRESENTATION TO
IRISH SOFTWARE INNOVATION
NETWORK
THE FUND
• The BDO Development Capital Fund
• €75 million
• Development and growth capital
• Established and export focussed SME’s
• Managed by Development Capital
OUR APPROACH
Development Capital’s Smart Funding Model
Experience and support
INVESTMENT TEAM
Knowledge and understanding
ADVISORY PANEL
FUNDING PARTNERS
Funding and advice
TARGET COMPANIES
• Established and profitable companies
Revenues between €10m and €50m+ p.a.
Ambitious management teams
Significant growth opportunities
TARGET SECTORS
• Key Investment sectors
ICT & Software
Food & Agri
Industrial (including Engineering & traditional Manufacturing)
Life Sciences (including Medical Devices) and Clean Tech
FUND OFFERING
• Investment amounts between €2 - €10 million
• 5 year investment term
• Flexible transaction instruments; equity, equity/debt
mix
SUMMARY OF PROCESS
Information required for initial assessment
i. Latest management & audited accounts
ii. Summary of growth opportunity
iii. Overview of management team & credentials
Turnaround time: Between 5-10 days
INVESTMENTS COMPLETED TO DATE
INVESTMENT CASE STUDY
MAIN INVESTMENT TERMS
Terms
Investment amount €8 million
Investment instrument €8 million for Ordinary Shares
Use of funds Acquisition of complimentary
businesses in the UK market.
TIME LINE PROCESS
February/March
2014
April 2014 May 2014 June 2014 July 2014
Assessment & meetings
Signed
term sheet
- 30th April
Diligence
Financial, Legal, Tax & Commercial
SPA & Shareholder Agreement
Investment
Committee Approval
Completio
n – 30th
June
Advisory Panel input
― IT services company providing outsourced IT solutions including:
• Managed Services &
• Business Application Services
― Diversified & blue chip customer base
• c. 70% private sector
• c. 30% public sector
― Strong track record of organic growth• Customer retention &
• “Pull through” revenues
― UK acquisition strategy
• 2 acquisitions completed in 2013
KEY CHARACTERISTICS
Broad Criteria (/ X)
Revenues €10 million+ p.a.
Scaling companies (revenues €5m - €7m p.a.)
Profitable
Ambitious & capable management team
Export led growth opportunities
TARGET COMPANY PROFILES
(i) Mid-sized, high growth indigenous companies Substantial & rapidly growing revenues of €10m - €50m+ p.a. Profitable Export market opportunities
(ii) Scaling companies Turnover of c. €5 - €7 million p.a. (achieved in a short period
of time) Growth opportunities Financial alternative to premature early stage sell-out
(iii) Established businesses / possibly family owned Need for not only capital but also internal change MBO/MBI Generational change or key management team changes
TARGET COMPANY PROFILES
(iv) Internationalised businesses e.g. Successful track record Want to pursue export opportunities
(v) Expansionary companies e.g. Opportunities for strategic acquisition / mergers as routes to
new markets
OVERVIEW OF THE INVESTMENT
PROCESS
Indicative Timeframe minimum 8 weeks subject to #2
1. Proposed investment terms i.e. term sheet
2. Information request list
3. Commercial, legal, tax and financial due diligence
work programme
4. Investment proposal & presentation to Investment
Committee
p
A
R
A
L
E
L
L5. Investment legal agreements – shareholder
agreements etc.
The Davy BES & EII Tax Relief Fund
Irish Software Association
BACKGROUND - BUSINESS EXPANSION SCHEME
Introduced 1984
Incentive for private investors
Long term equity capital
Two methods to raise EII funds
1. Private Placing (friends and family); or
2. Designated Investment Fund e.g. The Davy EII Tax Relief Fund
What is the Employment & Investment Incentive Scheme (“EII
Scheme”)
The reformed and renamed Business Expansion Scheme (BES)
Government reviewed 2010 and 2014
Summary of main changes:
COMPANIES
Increased investment limits
Wider scope; available to the
majority of SME’s
Investment term
INVESTORS
More attractive return
Davy BES/EII Funds – Key Statistics
― Longest running BES/EII Fund manager in the Country
― Raised 23 BES/EII Funds (4) amounting to €140 million
since 1995.
― Invested in c. 146 qualifying SME’s- 26 Counties
― Investment range from €250,000 - €2 million.
― c. €40 million of Funds under management.
― c. 56 investee companies employing over 2,000
people.
― Co-invested with Banks, Enterprise Ireland & Private
investors.
― Funds invested in all industry sectors.
Investee Company Examples
Food & Agri
Traditional Manufacturing
Renewables
Millions of tons composted
ICT & Software
Investment Sector Analysis- Number of Companies
50
3823
2213
1. TraditionalManufacturing
2. ICT & Software
3. Food & Drink
4. RenewableEnergy/EnvironmentalServices
Advantages of EII finance
― Investment Limits
€15 million* limit per company (previously €10m)
€5 million* in any 12 month period (previously €2.5m)
Competitive fixed cost of finance for 4 years*
Investment is Equity and therefore reduces gearing levels
Existing owners retain control of the business
No capital repayment for 4 years*
May trigger additional funding e.g. Banks or other private investment
*Subject to EU Commission Approval of 2014 Budget changes
Assessment criteria for The Davy EII Funds
Funds Criteria/Investment mandate
Established companies with a 3-5 year strong trading record
Capable and experienced management team
Companies involved in growth sectors and/or with growth potential
Positive net asset value and low gearing levels
Ability to repay investment after 4 years
Typical timeframe 8-12 weeks.
Investment Process— Fact find/Management team meeting
— Proposed investment terms i.e. heads of terms/deal sheet
— Information request list
— Commercial, legal and financial due diligence work programme
— Revenue investment approval
— Investment proposal & presentation to Board of BES Management Ltd
— Investment legal agreements
Investment legal documents & Cost of funds
Investment Structure
1. New Ordinary shares
2. No preferential rights
3. 4 year investment term
4. Capped return
5. No guaranteed exit mechanism
Typical legal documents
1. New articles of association
2. Share subscription agreement
- Covenants
3. Put and call option agreement
Cost of funds – range between c.5% - c.8% fixed p.a.
The Davy BES & EII Tax Relief Fund
Investment Case Studies
Specialises in designing student management and recruitment software
systems for higher education institutes in UK and Ireland
Offers 3 licensed software solutions including
Admissions and Registrar
Student Information Systems
Analytics
Software integrates with existing student record system
Customers
“Leading US software unit spends €10m on CampusIT”
Leading provider of general practice and pharmacy software across the UK
and Ireland
Formed in 2006 following merger between Medicom and Systems Solutions
Software
Products include Dispensary Software, EPOS and Special Healthcare
Software
Customers include
Community and Hospital Pharmacies
Primary Care GPS and Private Consultants
“Helix Health raises €9m investment to expand its
business”
Q&A
Points of Contact
Andrew Bourg
Partner, Corporate Investment & Business Advisory
Tel: 01 4700470
Email: [email protected]
Derek Henry
Tax Partner, Head of R&D Tax Services
Tel: 01 4700211
Email: [email protected]