Countries and businesses are looking to Artificial Intelligence in the race for competitive advantage. But how, asks James Johnson, a principal at accountants Hillier Hopkins, should they fund that investment to give them the critical head start?
………………………………….
THE AI race is on, with countries competing to attract the next big AI tech company and businesses seeking to stay one step ahead of the competition.
There are many free-to-use AI tools, such as ChatGPT, that have been quickly adopted by businesses to help with everyday tasks. They are without doubt enormously helpful but have their limits.
Putting aside the question of data protection, their application does not always solve the business-critical challenges faced. It is why so many businesses are looking to purchase or even develop their own AI tools designed to better support their business.
And that will often mean a considerable financial investment.
Funding new IT and software will be nothing new for most businesses. Software as a Service is commonplace, with its cost spread across the financial year. It is a model many AI software providers are following.
Some businesses will, however, wish to purchase software, making changes to it to better suit their business case. Here the cost can rise significantly.
Where possible, businesses will look to fund that investment through revenue and reserves. However, as costs increase, alternative funding options may be needed.
Most businesses will look to their banks but there are several grants available to businesses looking to invest in AI. The British Business Bank, while not a direct funder, has plenty of useful resources and signposts to support.
DIY AI
Many businesses are choosing to develop their own proprietary AI tools which will not only help to accelerate their own business but provide potentially valuable new revenue streams. However, costs too can quickly rack up, meaning serious investment might be needed.
Again, businesses can access a wide range of grant funding. The UK government, for example, has a grant programme for those exploring ways to protect against societal risks such as deep fakes and cyber attacks.
The British Business Bank also flags R&D grants that range from £25,000 to £10 million to help businesses with the commercial development of innovative “products, services and processes”.
External investment from angel or private equity investors may be another valuable source of funding. Typically, this will come at the expense of equity in the company. Here, a business may want to consider creating a separate business entity to hold and fund the development of AI products with investors holding equity in the new business rather than diluting the ownership of the parent company.
TAXING AI
Businesses that are developing their own AI tools should keep in mind that tax advantages may be open to them.
R&D tax credits will be available to businesses if they can demonstrate their AI project addresses a specific technological challenge. If it qualifies, R&D tax credits will result in a reduction in the corporate tax a business pays or, if pre-revenue, a cash payment.
The R&D tax credit regime has, however, changed and is now more complex, subject to greater scrutiny (to prevent abuse) and less generous.
Another consideration should be the Patent Box regime. Patent Box is designed to encourage businesses to keep and commercialise intellectual property in the UK by effectively offering a corporate tax rate of just 10% on qualifying assets. AI software will in many cases qualify.
The funding and tax landscape is complicated and advice should be sought before a business acts.
James Johnson is a principal at chartered accountants Hillier Hopkins. He regularly advises businesses on the funding and tax surrounding software and AI.
Visit www.hillierhopkins.co.uk.
………………………………….
Stay connected with local business through Business MK. Join our exclusive community for the latest news, insights, updates, features and thought leadership.
Stay informed – subscribe now at bit.ly/3MZiqzQ. Unsubscribe at any time.
