The 2018 Budget announced some proposed changes to the repayment of R&D tax credits for small and medium-sized businesses. How will these proposals affect you?
What is R&D relief currently worth?
Research and development (R&D) tax credits provide an enhanced corporation tax deduction for companies that incur qualifying expenditure. The rates of R&D relief have generally have been increased over the years and can be claimed by even more companies since the £10,000 minimum spend was abolished on 1st April 2012.
Since 1st April 2015 for every £1 of qualifying R&D expenditure, an additional £1.30 is allowed in the SME's corporation tax computation as a "super deduction". This means that the total tax relief equates to 230% of the actual R&D spend.
The R&D tax credit that companies can claim is currently unrestricted.
The current proposal, as announced at the 2018 budget, is that for accounting periods starting on or after 1st April 2020 the R&D tax credit will be capped at three times the loss-making company's PAYE/NI bill for the accounting period. The proposal is that any excess losses must be carried forward and offset against future profits which may take considerable time.
HMRC says the cap is required to reduce instances R&D claims and situations in which there are repayments being made to companies where minimal R&D activities take place in the UK in reality.
How it works now
A company has qualifying R&D expenditure of £8,000. As a result, it will be entitled to claim a tax deduction of £18,400 (£8,000 x 2.30). Assuming corporation tax on profits is paid at 19%, this will result in a tax saving of £3,496 - 43.7% of the R&D spend.
The SME in this example should be able to claim a cash payment, known as an R&D tax credit, instead. There's currently no limit to the amount that can be claimed and since 1st April 2014 the rate of tax credit is 14.5% of the surrendaible loss.
A loss making company that has spent £8,000 on R&D could claim a tax credit of up to £2,668 (£8,000 x 2.30 x 14.5%), equivalent to 33.35% of the R&D spend.
After the proposed changes
A company spends £100,000 on R&D in 2022. The SME R&D relief increases its loss by £130,000 so, under the current rules, the company is able to surrender the £230,000 loss for a 14.5% payable tax credit of £33,350 (equal to £100,000 R&D spend x 33.35%). However, in the same accounting period, the company has a PAYE/NI bull of £5,000 as most of its staff are subcontractors.
In the absence of any minimum threshold, the maximum repayable tax credit would be £5,000 x 3 = £15,000. This is equivalent to surrendering losses of £103,448 (£103,448 x 14.5% = £15,000). The company would be able to carry forward the remaining £126,552 against future profits. It is possible that the company may also be able to surrender some of that carried forward loss for a payable tax credit.
A well-known TV presenter has convinced the First-tier Tribunal to throw out HMRC's assertion that she was an employee. What might this mean for clients in a similar situation when considering the IR35 rules?
The changes that have affected the public sector bodies engaging contractors through intermediaries are being extended to the private sector from April 2020. From that date it will be the engager rather then the contractor who is responsible for deciding whether or not the engagement is within IR35.
Ahead of the changes, review clients' existing arrangements to ensure their income is being treated correctly. After April 2020, it is they who will be exposed to penalties for not operating the rules correctly. One of the key considerations is how much control the contractor has over the work they perform. This was examined in detail in the First-tier Tribunal case Albatel Ltd v HMRC (2019).
The case involved the provision of the services of Lorraine Kelly by the company to ITV. Kelly exercised considerable control over her working hours and the structure and content of her shows. HMRC had tried to argue that the control lay with ITV. Inevitably, conclusions have been made with the 2017 case of Christa Ackroyd, in which HMRC was successful in asserting that the presenter was an employee in all but name. However, the control issue appears to be the main distinguishing factor and this was drawn upon by counsel for Kelly.
In the previous case the broadcaster was able to direct the presenter as to what programmes she was to present and there was little or no input to the structure or content of those programmes as there was with Kelly. If your clients have a similar level of autonomy and control, they could use this case to back up their argument that their engagement is outside of IR35 though of course this must reflect the reality of the relationship, not just the paper contact.
Are you VAT registered and not currently using Xero accounting software?
We started talking about Making Tax Digital (MTD) a few years ago now and yet for VAT registered businesses the commencement date is almost upon us.
Starting April 2019 all VAT registered businesses will be required by law to submit their VAT returns every quarter via a digital source only. There will cease to be paper forms and even HMRCs current free VAT filing software is being discontinued.
We are encouraging all such businesses to talk to us about moving o Xero software as soon as possible in order to ensure complete fluency and accuracy in time for the MTD deadlines.
For those not registered for VAT, you will be required to go digital in time for quarterly accounts and tax filing from April 2020, so speak to us sooner rather than later.
To see what Xero cloud accounting can do for you request our brochure or follow the link to Xero online.
Succession planning is often seen as solely for when a company director-shareholder retires. However, if a sole director-shareholder dies and no plans have been made for the company's future, it can leave the company in a very vulnerable position. Whilst acting as a sole director-shareholder of a limited company has its benefits it also has its risks.
In order to avoid any difficulties or uncertainty in the event of the death of a sole director-shareholder, you should review your company's Articles of Association as soon as possible and make any necessary amendments, to ensure your company could continue to operate in such circumstances.
The good news is that this issue was addressed in the new model Articles of Association for companies incorporated after 1st October 2009. However, if your company was incorporation before this date then, as qualified Chartered Company Governance advisors, we can assist you in amending your company documents accordingly.
One important case in point shows how the High Court had to step in to take emergency action to save a business.
Mr P was a sole director-shareholder of Lancashire Cleaning Services. Whilst he appointed executors for his estate in his Will he did not update the company's Articles of Association to allow the executors to make decisions on behalf of the company, such as appointing a new director. When Mr P passed away, the company's assets were frozen and employees could not be paid, and the executors were powerless to help.
The situation in this case was considered an emergency, calling for the High Court to step in and rectify the register of members (shareholders) with the executors, so that they could pass a resolution to appoint a new director. Although the court usually requires a Grant of Probate before allowing this, the urgency in this case was sufficient for the court to proceed without, as it was thought the company would not otherwise survive.
Directors of small limited companies have generally always withdrawn money from their companies on a monthly basis to ensure they have enough money to live on. This is usually done on in the form of a small salary topped up with dividends.
At the end of the financial year your accountant then calculates how much dividend can be declared and hopes it's enough to cover the amounts withdrawn throughout the year!
This isn't really the true nature of dividends. They are financial rewards which can only be declared if there are profits available after the calculation of estimated corporation tax. There are also compliance issues to be dealt with too.
With the advent of the new dividend tax allowance it has meant that interim as well as final dividends may need to be declared, if your financial year end falls outside of the tax year.
HMRC are clamping down on these procedures and with digital technology can now prove if dividends are taken and then declared retrospectively.
Read more here on how to protect yourselves:
- Ensuring a proper paper trail for HMRC such as printing out a trial balance to show the company has made enough profit to declare an interim dividend;
- Recording both interim and final declarations in the minutes of board and annual general meetings;
- Completing dividend vouchers and distributing to each shareholder
These compliance procedures can often be overlooked by small companies but with recent case law where HMRC are reclassifying payments as employment it is essential you are covered or you could be looking at a large tax bill.
As we are also qualified Chartered Company Secretaries we can undertake these procedures for you to ensure you remain 100% compliant, so please just give us a call.
We have been nominated for the expert business and financial advice we provide to our clients when they have aspirations to grow their businesses.
The high growth programme that we deliver has meant we've helped clients in the following ways:
- helped grow one start up client to be a million pound company;
- a client who was on the brink of collapse to have achieved 30% growth;
- a stagnant client ready to close it's door through frustration, to adapt it's business in a different direction and achieve great success .
Please contact us if you would like to know more about our high growth programme.
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Setting your goals for 2018
The New Year is always a great time to start thinking about what you'd like to achieve in the next 12 months, either personally, in your business or both.
However, many of us like to think about our goals for the year ahead but unless we put in place a short term plan of how we're going to achieve them, then the chance of pulling them off is very slim.
Your short term goals can take many forms such as:
- Increasing turnover;
- Making cost efficiencies;
- Entering a new market;
- Recruiting new staff.
- Starting a new hobby;
- Thinking about retirement;
- Buying a new house;
- Planning a holiday.
Once you've decided on your goals you must then work out a plan of how to achieve these.
At Brooks Accountants we help you set strategic plans that ensure you realise your dreams.
Give us a call to discuss your ideas 01253 731791.
Suzie Brooks of Brooks Accountants has won the Women in Business Award for “Financial Advisor of the Year” in the Downtown Lancashire in Business Awards.
Established in 2003 by Suzie, Brooks Accountants offers a forward thinking approach to accounting to a range of corporate businesses and SMEs across the UK. Utilising her vast experience in the business world, Suzie’s business offers much more than your standard accountancy practice, including business advice that help clients grow their organisations through strategic planning and the use of simple tools in key business areas.
Suzie commented, “I’m thrilled to have won this prestigious award. It is testament to our innovative approach with clients. We don’t just communicate with clients when tax returns are due, we work together on a regular basis to ensure clients have up to date information with which to make valuable business decisions. We take the time to get to know each client, where their business currently sits in their market sector, where they want to be in the next few years and then consider how this can be achieved. A range of clients have significantly grown their businesses over the years with our support.”
Another of Brooks Accountants services includes business support webinars. This has proved extremely popular with clients and prospects who have found the advice extremely beneficial. These cover a wide variety of topics including:
- Understanding the numbers – What your accounts really mean and how to use them
- How to set budgets and cash flow forecasts
- Putting together business plans and projections
- How to access finance
Suzie concluded, “I hope this accolade will enable organisations to see the value we can add to their business and how we can help them succeed through strategic financial planning and management.”