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.
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.
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.”
It’s not exactly a riveting subject, but there are new data protection rules coming into effect that could affect many businesses.
You’ve probably already seen plenty of ‘stuff’ about GDPR, which stands for General Data Protection Regulation.
The new legislation comes into effect in May 2018 and it’s relevant to any UK business, small or large, that holds customer data. In other words, most businesses.
To help Britain’s smallest firms get their house in order, the Information Commissioner’s Office (ICO) has confirmed that its GDPR helpline will go live on November 1 2017.
The VAT man often gets a very bad press and most people would expect him to be totally bah humbug when it comes to having a wild time at the Christmas party, but hang on, this isn’t necessarily the case.
Providing entertainment for employees to reward them for good work or to help maintain staff morale should help your business and therefore it can be argued that you are spending the money for a business purpose.
VAT is reclaimable when it is incurred for a business purpose, so you can see how it is possible to claim the VAT back on your party, but there’s more to it.
HM Revenue are actively targeting small businesses
We’re all aware of the multi-national companies that seem to be able to avoid paying a fair amount of tax, but we don’t often hear of the other corporates who manage to be able to negotiate cushy arrangements with the tax man.
Large corporates have exceedingly deep pockets to pay for specialist legal and financial teams and are often more than a match for the Inland Revenue. Unfortunately this means that the softer target of small businesses are now beginning to experience the uncomfortable attentions of the tax man.Read More
Is there a more efficient way of taking income from your company?
For most Company Directors, taking a salary higher than the National Insurance threshold is not a particularly tax efficient way to receive renumeration from their company. Taking income as dividends has always been a better choice. However, from April 2016, dividends over £5,000 per annum are taxed at 7.5% for a basic rate tax payer and 32.5% for higher rate tax payers. This means that it’s worthwhile looking at other ways to receive income.
If you own a buy to let residential property or a second home then the rules for claiming mortgage interest as a cost against your profit are changing.
When George Osborne announced this tax change in the summer 2015 budget, he implied that the extra tax would only hit higher-earning landlords.
Whilst it’s true that every mortgaged landlord who pays 40% or 45% tax will indeed pay much more under his proposals, some basic-rate taxpayers will also pay more tax. This is because the change will push them into the higher-rate bracket, even though they earn no additional income.
In fact, contrary to the Chancellor’s suggestion, the only buy-to-let investors who will not be hit are the very wealthy who buy property in cash and who don’t need a mortgage.
The future change is landlords’ inability to deduct the cost of their mortgage interest from their rental income profits. In other words, tax will be applied to the profit made before deducting the mortgage interest.