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Tag: R&D

R&D

  • Autumn Statement 2023 – More Drip Than Waterfall

    This was very much about ‘making work pay’ and aiming to improve productivity. Important though national insurance tax reductions are to help sole traders and partnerships, they do nothing to help those caught by frozen thresholds or running small limited companies.

    Sole traders and partners

    With Class 2 national insurance abolished and Class 4 national insurance reduced by 1% from April 2024 but dividend tax unchanged, more businesses may decide to remain as sole traders rather than incorporate or even prefer to disincorporate.

    When you add in that the cash basis will become the default way to measure tax profits from April 2024 (for any size sole trader) together with the previously known companies house reforms requiring more company information to be made public, the government clearly wants small businesses to stay as sole traders unless they’re large enough to embrace being a limited company in full.

    To back this up, the cash basis for measuring tax profits from April 2024 will allow losses to be offset in the same way they are for the accruals basis (the one that accountants with use) and there won’t be an interest deduction cap of £500 with all trading interest becoming tax deductible.

    The cash basis may have been improved to also ease the introduction of Making Tax Digital – MTD – which will benefit from some simplifications from April 2026 (with over £50k turnover or rents) and from April 2027 (over £30k) where the quarterly submissions will now be cumulative and there won’t be an end of period statement (EOPS). MTD won’t yet be required for partnerships or jointly owned property. 

    NB For sole traders and partners with profits under £6,725, or tax losses, who want or need a state pension credit year, can still voluntarily pay Class 2 £3.45 a week, so Class 2 will still exist for many. 

    Owner-Directors

    With dividend tax at 8.75% between £12,570 and £50,270 but employee national insurance at 10% from January 2024, this differential is narrowed further, making it more likely than before that an owner-director should take a salary instead of a dividend. If you continue to take dividends, your income tax return will need to show your own company dividends separately from any others and your percentage share ownership, presumably to help HMRC track these back to your company.

    If you continue to embrace being a limited company, investing to save the higher corporation tax, but need funding to do so, you might benefit from an external EIS investor who will continue to benefit from tax breaks until 2035, which should encourage more investors to enter the small business scene.

    If, despite it being harder, you remain eligible for research and development tax credits, the R&D work you’ll need to do if you’re loss-making to maximise your cashback at 14.5% will fall from 40% to 30% from April 2024, meaning that you’re not expected to spend as much on R&D. Perhaps the 40% threshold was probably too high for many!

    Limited companies – 100% tax relief on new assets – ‘Full expensing’

    Much is said about full expensing but it has no value for most small limited companies who already benefit from 100% tax relief, called AIA, on most fixed asset spend of up to £1m per year. Full expensing only applies to new assets purchased by limited companies whereas AIA applies to sole traders and partners and second hand assets. 

    And don’t forget the same Chancellor increased corporation tax from 19% to 25%/26.5% meaning many companies won’t be better off overall. 

    After all the media interviews I was expecting a waterfall of tax improvements for small businesses, but we’ve  ended up with a dripping tap.

  • 2023 Tax Year End Planning

    Pensions

    With corporation tax increasing from 19% to 25%/26.5% many company owners may wish to delay some pension contributions to after April 2023, subject to using the £40k annual allowance effectively.

    High earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme before the end of the relevant tax year.

    If you’re likely to become an additional 45% taxpayer from April 2023 for the first time because your income is between £125k and £150k, you’ll save an extra 25% instead of 20% by making pension contributions after April 2023.

    Spouse Dividends

    Since 6 April 2022, dividend tax has been at its highest level. If you can take more dividends from your company you might consider asking your spouse to take on some shareholder responsibilities and  receive some dividends, particularly before 5 April 2023 while the £2k 0% tax band remains available.

    From 6 April 2023, the £2k is halved to £1k so this advantage reduces, however, spreading the tax costs across lower tax bands is likely to remain advantageous.

    National Insurance – State Pension Top Up

    From 6 April 2023 the ability to make top up payments for earlier years is significantly reduced.

    Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in your state pension qualifying years. From this April this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

    If you’re not sure, you need to check your Personal Tax Account, which despite its name also shows your state pension.

    Research & Development

    One major change from this April is the reduced cash credit for tax loss-making SMEs. The effective value is currently 33.35% but this is being reduced by nearly a half to 18.6%. (The government is punishing SMEs for the poor practices of non-qualified companies set up to claim cash backs.) You may therefore wish to check whether some costs can be brought forward to access the current higher cashback rate.

    On the other hand, if you’re profitable with over £50k profits your marginal tax rate will be increasing by at least an absolute 6%. The combination of this rate increase and the reduced credit from 230% to 186% is a net value increase from 43.7% to 46.5% for R&D spend from April 2023.

    The increase in the value of a tax credit under the alternative RDEC scheme is a net tax credit of 15%, still lower than the percentages above, meaning it may remain less appropriate for many SMEs. 

    If a major part of your claim is overseas contractors, these will no longer be eligible and you may wish to bring some of those forward if possible. However, if you’re looking forward to claiming data and cloud hosting as an R&D cost, these become eligible from April and a delay might work out depending on the project plans.

    The requirement to provide more details is already fulfilled when On The Spot Accountants make claims. If the advance notice of a claim ends up in the final legislation we’ll be keeping in touch with you to ensure a notification is submitted even if it’s a protective one. Happily, most client tax returns are easily submitted within the 6 month required timeframe which may supersede the need for any advance notification at all!

    Super Deduction 130%

    As this ends on 31 March 2023, bringing forward a large capital spend might be worthwhile saving an effective 24.7% of corporation tax. However, as this was only a way to mimic the 25% increased corporation tax rate from 1 April 2023 and has certain restrictions, if you have profits over £50k, capital spend is likely to save you more, 25%/26.5%, corporation tax by waiting until 1 April 2023.

    Capital Gains Tax

    If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2023, after which your tax free annual exemption of £12,300 is reduced by more than half to £6,000. For a couple selling a buy-to-let property this might cost tax of up to £3,528 for the sake of a few days.

    Likely, more valuable, is the increase in corporation tax for companies who might save 6% on the whole gain by exchanging before 1 April 2023 and if your year end isn’t 31 March, it might be worth changing it!

    You’ll see there are some twists and turns with these changes, sometimes bringing forward plans is the better answer, sometimes delaying plans is better. Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. In particular, some changes have slightly different effects if your year end is not 31 March.

  • 2022 – Top 8 Tax Queries

    1. Extraction of profits from your limited company 💪

    We had fun with changing national insurance thresholds and rates but got there in the end! Optimum director salaries might be £12,570 or £11,908 with dividends. Other ways to take money from your company include home office rent, pension contributions and interest on loans made to your company. Dividends were difficult for some where sufficient after-tax profits weren’t achieved and these should be repaid to avoid other tax issues. 

    2. Using tax losses to generate a cash refund 👍

    Limited companies, sole trader and partnerships enjoy different rules with some surprisingly helpful results. By definition, when you have tax losses you’re likely to need a cash injection and the tax system can help you. We’ve made many claims, but also found HMRC needed to be chased more than usual to part with your cash! We’re known for never giving up 🙂

    3. Research and development cash refunds 💰

    Along similar lines, if your company also carried out R&D, we made many claims to get you a cash payment from HMRC to encourage you to do more for the good of the economy. We’re not sure the new restrictions will help you much more from April, however!

    4. Capital allowances – 130% super-deduction and electric vehicles 🚘

    We’ve made many 130% capital allowances claims for limited companies for new equipment and 100% tax relief for new electric cars. If cash has been tight, hire purchase was used to further help with cashflow.

    5. Capital gains tax – residential property 🏠

    Taxpayers selling a rented or second home needed advice and real time tax returns prepared. With many also benefitting from principal private residence relief, or for overseas residents, pre and post April 2015 gains, the calculations got a bit interesting! We’ve used the rules to the optimum to help keep these bills down.

    6. VAT – Overseas business to business services 👥

    It’s very easy to get this area wrong. When you provide services to another business and invoice that overseas company, it’s ‘outside the scope’ for VAT. This is a sweet spot where no VAT is charged by your business and your business is still able to reclaim VAT on all costs as normal. This means you may want to voluntarily register for VAT to recover this VAT if it’s worth the administration of preparing VAT returns.

    7. Rewarding staff 🎉

    We’ve advised on ensuring all taxes are considered: corporation tax, VAT, income tax and national insurance. Annual parties up to £150 for each person and gifts up to £50 cost each are the most tax efficient as long as they’re not in recognition of doing a particular piece of work or meeting a target. Pub or restaurant visits are more problematic. EMI share options are more tax efficient but don’t always suit the company culture.

    8. Off-payroll working and IR35 🙄 

    Again, we had a brief time thinking off-payroll working was behind us, but it ended up staying. We’re seeing more customers of our clients happy to confirm they understand a piece of work is outside these rules and therefore more consultants coming back setting up limited companies. It’s essential to get your Status Determiniation Statement or SDS, otherwise you’re at risk of a very high tax bill.

    Here’s to 2023 and making the most of the system we’re presented with! Happy New Year! 🥂 

  • Frozen! Temperatures, Allowances & Growth

    Frozen

    Income tax, national insurance, inheritance tax thresholds are all frozen for over 5 years until April 2028 and the VAT threshold frozen at £85k until April 2026. The real cost of this is usually large enough, but in a climate of increasing inflation, it’s even greater.

    Small company owners could aim to take fewer dividends, but they too have to pay higher energy bills and mortgage costs. Sole traders and partners who can’t control the income tax band they’re in may be surprised at the additional income tax and national insurance in future tax bills, possibly encouraging them to become limited companies where they can decide what to take as income. Each case will be slightly different.

    Parents should also remember that the real value at which they have to refund child benefit is reduced, again, another reason to be a limited company to help ensure they don’t have to increase their effective ‘tax’ rate further.

    Reduced

    With capital gains tax tax free allowances reduced from £12,300 to £6,000 from next April 2023 and only £3,000 from April 2024, many more taxpayers, including business owners and landlords, will start to pay capital gains tax on modest gains, costing up to £2,600 of additional capital gains tax.

    Similarly, reducing the dividend tax free allowance from £2,000 to £1,000 next April 2023 to only £500 from April 2024, catches many small investors as well as small company owners who even paying only basic rate tax will pay an addtional annual £131 on top of the additonal £446 previously announced due to the 1.25% dividend tax increase, a total of £577 each year.

    Calling it a reduction in the additional rate threshold sounds harmless, but it introduces the 45% income tax rate at income of £125,140 instead of £150,000. For small company shareholders, this means dividend tax will be 39.35% on income over £125,140. This is after paying at least a further 6% of corporation tax, a total of 25%, in their company. That adds up to a lot of tax for a risk-taker living off uncertain, volatile profits. 

    NB HMRC is unlikely to be sufficiently resourced to deal with the increased number of tax returns, affecting service levels going forward.

    Growth?

    How will any of the above help growth?

    It can’t be a way to encourage smaller businesses to grow beyond inflationary price increases. The additional effort offers little personal reward unless you aim to grow and sell quickly, recognising a capital gain paying 10% tax when you sell up! In the meantime, your dividend tax will be 8.75%, 33.75%, 50.62% or 39.35% depending on income levels. 

    Or you could take the view that you’ll save corporation tax through significant investment waiting for a return in the longer term, taking out smaller, affordable salary and dividends or encourage third party investors to help fund you and your company. 

    For those claiming research and development (R&D) allowances or tax credits, the SME scheme is watered down because of the high levels of spurious claims. The additional reduction to tax was 130% and will become 86% from next April 2023, with the cashback rate being reduced from 14.5% to 10% at the same time.

    The combined effect on £100 of R&D for a loss-making company is a reduction to the cashback from £33 to £18. Hardly a sign of encouragement. It’ll be more valuable to carry forward this tax loss to save higher corporation tax of 25% or 26.5%, if you expect to achieve taxable profits in the near term and in the meantime you can manage your short term cashflow accordingly.

    Summary

    This is a Chancellor and ex-Chancellor who seem to have frozen out small businesses and the contribution they bring to the economy. If there’s a good business idea, the general theme seems to be find an investor or other funding to grow enough so that increased tax bills are affordable. We won’t know if this has worked for some time. 

  • Autumn Budget – Cheers From Your Town?

    Investment – Capital allowances of 100% or 130%

    If you invest in your business you’ll receive 100% tax relief on purchases up to £1m! This was due to be reduced, but today it has been extended to continue until April 2023. So invest in any machinery, van, computer, for your business and you get a full tax write off in that year, even if you borrow to buy it. 

    If you’re a company, however, you’re more likely to want to claim the super-deduction of 130% which saves even more tax and without a £1m cap so nothing changes for you today. Although it’s worth noting this is only avaialable for new assets and more restricted types of plant. 

    Company Research and Development Tax Relief – Restriction and Extension

    Good to know the UK spends quite a lot on R&D but I understand the OECD thinks it’s not all ‘proper’ R&D.

    One difference in comparison to other countries allowing spend outside the UK will, from April 2023, be restricted to UK spend only. By contrast, as widely requested, qualifying spend will from April 2023 be extended to include data and cloud costs which can form a large part of necessary R&D costs.

    Further details will be issued.

    Pension Scheme Withdrawal Age Increase – From 55 to 57 Years

    Confirming a previous announcement, however, many people will have made plans to take out at least their 25% tax free lump sum at age 55, perhaps to pay off their mortgage. If you don’t act before 6 April 2028, you’ll have to wait until you’re 57. 

    In the meantime do see if you can benefit from tax relief by making contributions into a scheme.

    Landlords, Sole Traders and Partnerships – Tax Year End

    Coming in from April 2023 and 2024, look out for this and whether you should change your year end to align with the tax year. Most of you will already use 31 March or 6 April, but if you don’t you may find you get a better result making the alignment before 2023.  

    Personal Capital Gains Tax – Sales of Residential Properties

    Where tax is due, UK residents now have 60 days after completion to report and pay the capital gains tax due. The online portal has had some problems so this gives HMRC and the taxpayer time to clear them soon after the transaction.

    Underpaid or Failure To Repay Child Benefit, Gift Aid, Pension Charges 

    As a result of losing a tax case, which they’re appealing, it’s been made clear today that HMRC can go back at least 4 years and recover any overpaid child benefit, gift aid relief or underpaid pension charges.

    The figures can be very large when paid back in one lump sum with costs, so ensure you understand the rules and pay the correct amount on time.

    Let us know if you need to know more about these or any other changes announced today. 

  • Budget 2020 – A pot-hole free drive in your electric car through magic money trees?

    There is much to be happy about in today’s Budget, where the magic money trees are well and truly thriving!

    Businesses will benefit from many announcements, particularly those who trade from a property, have one or two employees, and need a new car!

    Business rates are abolished for a year for rateable values of less than £51k and these same businesses will receive a £3k grant, as a response to the Coronavirus but it’s also part of the overall picture of dealing with competition from Amazon and other online retailers.

    Where possible and appropriate for your business model, businesses going forward may need to embrace online retail further. Having said that, many can provide a niche, local, personal service perhaps relying on online marketing, such as Facebook, but not online sales.

    With the money saved, and assuming you needed one already, an electric car is very tax efficient. The 100% write off against your tax bill has been extended beyond 2021 to 2025 with no benefit in kind until March 2021 and then minimal after that. VAT still can’t be recovered, however, apart from 50% through leasing.

    Your employees earning over £9,500 will pay less national insurance from April 2020, but you’ll still pay 13.8% national insurance on their salaries over £8,788 with a £4k offset from the increased employer annual allowance of £4k. For example, if you have one employee earning £37,774, the £4k annual allowance will offset all the employer national insurance due. Even employ a veteran where you save employer’s NI for a year. And remember to claim the statutory sick pay for up to 2 weeks if your employees need to be away from work due to the Coronavirus.

    If you’re a sole trader, your Class 4 national insurance of 9% will, from April 2020, only kick in after you’ve earnt profits of over £9,500. If the Corornavirus reduces your profits, however, remember to claim Universal Credit. You may need to pay Class 2 national insurance voluntarily to maintain your state pension credit.

    If you also carry out Research and Development, R&D, the new restriction on cash refunds for loss making businesses is still coming in, but delayed until April 2021, and if your claim is less than £20k, there’ll be no restriciton at all. So, as you were! Carry on with R&D and cash claims even if you are just a one or two director company on minimal salary.

    If your business survives the Coronavirus, perhaps with funding help from HMRC Time To Pay or your bank and one day you’re ready to sell your business, you’ll pay capital gains tax of 10% on the first and only £1m business capital gain in your lifetime, and 20% on the rest of the gain. Many small businesses are sold for less than £1m, so this is a welcome compromise effective immediately.

    Some of the good news is ofset by confirmation of the corporation tax rate remaining at 19%, but also HMRC being given 1,300 more staff to get tax HMRC believes it’s entitled to! Be careful you don’t get caught up in that, where HMRC have been known to go for low hanging fruit, possibly hanging on a magic money tree 😀, rather than trickier cases. 

    Stay well! 

  • How To Make Profits And Pay No Tax – Case Study #1

    Imagine you’re a consultancy business with a few staff. After receiving tax efficient investment funds under SEIS (not available to large companies) you purchased top quality computer equipment for £80k for your staff to use and spent £120k on research & development into groundbreaking consultancy software.

    Your profit for last year was made up of:

    Sales             £400,000

    Costs           (£220,000) (£120k R&D + £100k salaries/other costs)

    Depreciation (£20,000)

    PROFIT         £160,000

    If you know the corporation tax rate is 20%, you might expect your company tax bill should be £32,000.

    However, a few adjustments are required to know how much tax you should pay.

    Profit            £160,000

    Depreciation  £20,000 (Ignored for tax purposes)

    AIA                (£80,000) (Capital allowances which replace the Depreciation – 100% of the computer equipment cost)

    R&D             (£156,000) (Tax enhancement available to small businesses)

    TAX LOSS    (£56,000)

    Your profit of £160,000 has become a tax loss of £56,000! You’ve become a tax avoider!

    This and other tax avoidance is perfectly legal. 

  • #Budget2014 (Small) Makers. Doers. Savers. + Investors?

    The Chancellor chose this headline, but I think Investors also get a look in.

    (SMALL) MAKERS

    I take this to be businesses. In fact, it’s largely small to medium companies that benefit from today’s announcements being the changes to AIA, SEIS and R&D.

    What are AIA, SEIS and R&D?

    AIA – Enables all businesses to spend up to £500k on plant & machinery and to receive a 100% tax allowance on all that expenditure. The effective date is this April 2014, but take care with the unnecessarily complex transitional rules.

    Companies should also take care about the effect on deferred tax which will restrict the ability of your company to pay tax efficient dividends.

    SEIS – This has now become a permanent feature. Your start up company can continue to attract tax efficient investment in your company shares.

    R&D – The Research & Development repayable tax credits for small companies have been increased from 11% to 14.5%. This is very welcome for small companies desperate for cash at the beginning of the investment cycle. It’s now time to bring this into the main stream tax consideration, and ensure you aren’t eligible, rather than think this is for other companies. And make sure you are a company as this doesn’t apply to sole traders/partnerships.

    Please note this applies from 1 April 2014, so you might want to delay some expenditure if this is possible at this late stage.

    DOERS

    I presume these are employees. Acknowledging that there are too many 40% taxpayers by getting the tax thresholds closer to April 2012 levels wef from April 2015, helps the hard hit middle income earners.

    The childcare costs announced several times helps employees but doesn’t help owner-managed businesses, where the current voucher scheme is more valuable. Make sure you set up a voucher scheme now, so you can continue to use it after the new scheme comes in.

    SAVERS

    A big nod to savers that the government is On Your Side.

    From 1 July 2014, the ISA threshold is £15,000 whether it’s cash, shares or a mixture. This will save higher rate taxpayers a lot of tax over several years. As interest rates increase, this becomes more valuable.

    From April 2015, allowing £5,000 of interest income to be taxed at 0% is worth up to £2,250 per year if it applies to a 45% taxpayer. This might encourage small business owners to charge their companies interest on a director loan in credit. The company saves 20% corporation tax, but the owners may not be taxed on the interest income.

    With the higher personal allowance and basic rate band effective from April 2015, small business owners might benefit from delaying a few dividends this year to benefit from a 0% net tax rate, which might otherwise have been taxed at a net rate of 25%.

    INVESTORS?

    Perhaps this includes pensions, as these are more like investment vehicles than any other. A massive improvement to the flexibility of defined contribution schemes fits in with a modern working pattern where many people no longer retire fully at a certain age.

    SEIS – This is very valuable for high net worth individuals looking for a better return than bank deposits and quoted shares. It’s good to see it’s a permanent part of the investor’s options.

    As many of today’s favourable announcements apply from April 2015, we can only speculate what will be announced in the March 2015 Budget, a few months before a general election.

  • #Tax Myth 10 – R&D Tax Payments Should Always Be Claimed

    With its tax reliefs improving over recent years, Research & Development claims should be given more attention.

    For SMEs, when you spend £100 on R&D, your corporation tax is not only reduced by the £100 you’ve spent, but also by an additional £125, taking the total deduction against your company bill to £225.

    If you’re paying 20% corporation tax, you’ve saved additional tax of £25 (£125 @ 20%), taking total tax saved to £45 (£225 @ 20%).

    If you’re making losses (likely in a growth phase) this tax relief is delayed and has no immediate value.

    Fortunately, you have another option. You can decide to forgo the later tax benefit of £45 and trade it in for an earlier cash payment of 11% of the losses. For the total losses of £225, this equates to nearly £25.

    You can see you’ve received nearly one quarter of your R&D spend back in cash to help you grow your business, however, this cashflow improvement has cost you £20 of tax relief (£45 – £25).

    Therefore, if you’re expecting to make profits in the following accounting period, it may be less beneficial to reclaim the cash tax payment and instead wait to save more money against next year’s corporation tax bill.

    The same principles apply where you’ve subcontracted the R&D and your claim is reduced by 65%. The £20 cost of taking cash earlier referred to above becomes £16, or 16% of your spend on R&D.

    Follow us on Twitter for more up to date business tax information.