The R&D tax relief is aimed at entities that are registered for UK corporation tax, so primarily UK companies.
The relief itself is administered through the company corporation tax filing regime.
What are some of the key benefits?
Cash paid to companies that are pre-revenue and / or loss-making to reward them for undertaking R&D work – even if no tax has been paid by the company as yet!
Reduction in corporation tax payable or refund in cash for those companies that are profitable
Average claims for SMEs of c£50,000+
Can be claimed year on year
Administered by dedicated specialist HMRC R&D Units across the country
Typical HMRC review process of 28 days from submission
HMRC Advance Assurance process for first time claimants
Can go back two years retrospectively to claim for earlier projects
No matched funding
No equity to give away
Despite these benefits, it is surprising how many companies continue to overlook this government tax incentive and potentially miss out.
With this in mind, we have recently set up a new course on the UK R&D tax relief that might prove to be a useful primer for founders or entrepreneurs who would like to learn more about this attractive UK tax incentive and how you might benefit.
In this edition of the Get Funded! podcast we cover some additional tips for film production companies that may be seeking advance assurance from HM Revenue & Customs that they are a qualifying company for the purposes of raising funding under SEIS / EIS.
Further info to enclose for SEIS or EIS film company HMRC advance assurance applications includes:
a description of the film company’s role in the production
the name of the film
how the company secured the production
what other parties may be involved e.g. co-producers, SPVs etc.
In this episode of the Get Funded! podcast we cover the types of trades that qualify for funding under the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
We discuss the HMRC excluded activities list that you need to check to confirm that your proposed trade is not listed i.e. excluded. If not, then you should be okay.
There is a relaxation for these excluded activities to be included within your trade although it must not amount to a ‘substantial’ proportion of your overall trade. ‘Substantial’ for these purposes is deemed to amount to no more than 20%. The HMRC advance assurance procedure would be key in these circumstances.
We pay particular attention to the potential problem for software companies (particularly software-as-a-service (Saas) based companies) given that the receipt of royalties or licence fee income IS an excluded activity. There is a carve-out from this exclusion for companies that create the whole or greater part of the underlying asset that generates the licence or royalty fee income – most software companies rely on this exemption to qualify for SEIS / EIS – but there are some further traps for the unwary….
Listen to an audio version of this Summary Budget 2015 round up of the key tax changes impacting on entrepreneurs or read the text version below:
An audio download link is available at the end of this post!
Reduction in Corporation tax
Continuing George Osborne’s pledge to make the UK one of the single most attractive places to do business in the G20 he continued with his downward pressure on the UK corporation tax rates. Not content with reducing the main rate to 20% from 28% not too many years ago, he pledged to reduce it further to 19% by 2017 and down to 18% by 2020.
Before we get too excited about the CT rate reductions, it was once again a “give and take budget” as Mr Osborne announced some far reaching changes to the dividend tax regime that will impact on many entrepreneurs and increases to the minimum wage – the now so called “Living Wage”.
Dividend tax changes
It has long been the case that entrepreneurs could extract profits from their companies as dividends rather than salary – the key advantage being NIC savings as dividends are not (currently) subject to NIC. The income tax suffered on dividends is lower than salary as dividends are only available from retained profits that have been subject to corporation tax – so a tax credit system is applied to dividends that, in essence, results in 0% income tax payable by basic rate tax-payers (so broadly up to £42,000 – £43,000); 25% of the net dividend payable for higher rate tax payers and 30.6% for additional rate tax payers.
Seemingly forgetting about the double taxation impact on dividend payments, the Chancellor announced that there will be a £5,000 dividend allowance from 6 April 2016 (whoop whoop!) and then a 7.5% additional tax applied to dividend income – so our rates now become basic rate: 7.5%; higher rate: 32.5% and additional rate: 38.1%.
Looking at the HMRC projected figures, they are looking to net quite a windfall on this change that is a tax grab via the back-door – I don’t think many entrepreneurs have quite grasped this change as it was positioned as a change that might impact on those with substantial quoted shareholdings and contractors.
Will we see larger dividend payments pre 5 April 2016 with founders leaving credit loan balances to draw down over the foreseeable future?
Employment allowance increase
We should see the £2,000 NIC allowance for employers increase to £3,000 from 6 April 2016
Annual investment allowance
The annual allowance for investment into capital equipment (e.g. PCs, servers, desks, chairs, machinery etc) was set to fall to £25,000 pa by the end of this year but this was increased and pegged at £200,000 for the next five years.
There were some further changes to EIS building on proposals from the Autumn Budget Statement that include proposals to cap the total amount that can be raised under EIS at £12m (£20m for ‘knowledge intensive’ companies).
Also, a new limit on companies raising EIS making it available only to those companies that have been trading for less than 7 years (10 years for knowledge intensive companies) – this change seems unreasonably harsh for longer more established companies that might want to access capital. The requirement for 70% of the SEIS cash to be invested before shares can be issued under EIS will also be removed as originally noted in the March 2015 Budget. Finally there was reference to ensuring that EIS funds are directed toward developing companies so there will be restrictions on using EIS monies for buyouts and acquisitions and more of a need to demonstrate that the funds are being employed to develop and grow trading companies.
There were no changes announced to the SEIS regime.
Many entrepreneurs will have diversified their risk with potentially one or more buy to let properties within their portfolio. These were also hit with some quite serious changes to the tax regime with the most hard hitting being the reduction in interest relief on buy to let mortgages being reduced to the basic rate of tax only. Currently, landlords can offset the mortgage interest at their marginal rate of tax (so potentially up to 45%). These new rules will be phased in to ease the pain of potential deleveraging for some landlords but the writing is on the wall for many – and who’s to say that this is the end with potential for 0% interest relief in the future….?
There will also be the removal of the 10% wear and tear allowance from 6 April 2016. Yet more pain for landlords.
On the downside, there were announcements that those with total income over £150,000 would be hit with reductions in the amounts they can put into their pension with the £40,000 annual allowance being tapered away with it hitting just £10,000 for those earning £210,000 or more. This is a admin headache all round and it comes into force from 6 April 2016.
On the plus side, there was a consultation announce to explore the best ways for pensions to be saved and a seemingly open approach to considering alternative finance in line with improvements to ISAs – this is great news for our thriving Fintech sector.
Inheritance tax changes
Long discussed and unsurprising was the pledge to increase the inheritance tax level to £1m to allow homes to be passed on without incurring IHT. Slightly odd in that the £325,000 nil rate band remains in place for the next 5 years but we have this additional £175,000 especially for the family home. Inflation may start to dig a hole into that £325,000 allowance rendering this less beneficial over time than the headlines suggest.
It was a shame that we didn’t see any changes to the VAT MOSS / (#VATmess) regime and I think the changes to dividends and pensions will add to uncertainty for many entrepreneurs and their advisors as the goalposts keep moving which is disappointing.
It has been a busy week at ip tax solutions with three R&D tax credit claims securing a total of over £400,000 of R&D tax credits landing in just one week!
The successful companies are all technology companies building new software platforms based from Manchester to London. The claims were agreed within 28 days without query by HM Revenue & Customs. This continues ip tax solutions’ 100% success record.
One of the claims (worth £126,000) was the result of a chance 10 minute discussion with the CEO – he had wrongly assumed that the company’s activities and structure meant that it would not qualify for SME R&D tax relief. I helped explain how the relief could apply based on their facts. With just one week to go until the deadline for making the claim elapsed, we pulled together a robust technical report and calculations and filed the claim with HMRC on time.
The company was thrilled to receive over £100k cash in less than a month!
The other two tech companies each received £175,000 and £107,000 respectively wired directly to their bank accounts within 30 days (#happyclients).
Don’t risk missing out on your R&D tax credit claim – a 10-15 minute conversation might be all it takes to help assess your eligibility for a claim and with average claims of over £100,000 for this week’s successful claimants it would be a shame to miss out…!
Coined a #VATMESS on Twitter, this is all part of an exercise to ‘harmonise’ EU VAT rules to prevent unfair competition where some companies may be selling from lower VAT jurisdictions – if only harmonisation could be so simple!
In summary, the new rules require businesses to determine whether their customers are businesses themselves (B2B) or ‘consumers’ (B2C) – if its the latter, sellers are required to apply VAT at the consumer’s local rate of VAT…. yes, you read that right: businesses that are exporting their electronic services (e.g. software as as service (SaaS), apps, plugins, downloads, ebooks etc) are required to identify the status of each customer and then apply local rate VAT to the sale if it is to a non-business customer (B2C).
Before we get mired in the admin burden of VAT MOSS, we need to know whether or not our customers are in fact businesses? Identification and evidence of their VAT registration number (or local equivalent) is the primary determinant (to give seller’s ‘certainty’) although the rules afford some flexibility – at the seller’s risk – if the customer can prove in other ways that they are a business. There are penalties that can be levied by the local countries and can be applied over a 10 year period….
Even if you establish that they are consumers (B2C), the fun doesn’t stop there as you need to know which country’s local VAT rate to apply – what if the customer is using a mobile device when they purchase whilst on their travels…?
For specific VAT MOSS queries contact HMRC on their dedicated 2015 EU VAT email: email@example.com
I don’t think we’ve heard the end of this and I expect further refinements and (hopefully) relaxations as the UK Government realises the negative impact on enterprise and export by UK smaller companies – the exact things they want to encourage…
The quick answer is YES – you can raise funding under both SEIS and EIS but there are some important points to watch including:
If you wish to raise cash under both schemes, you must issue shares under SEIS before EIS. You can’t raise money and issue shares under EIS and then seek to raise money and issue under shares under SEIS after. It kinda makes sense but one to watch…
You can only follow on with an issue of shares to investors under EIS once you’ve spent at least 70% of the SEIS cash (no sniggering at the back!). This can raise some practical difficulties as the SEIS investment limit for the company is capped at £150,000 so you don’t want to be back out on the investment trail too soon. It is possible to raise the SEIS and EIS money jointly but to take great care in the issue, timing and other matters related to the shares and investors. *******
There are some other ‘funnies’ around timing of appointment to Director etc which can differ between the schemes among other things so you need to take care as you don’t want to jeopardise the EIS relief further down the line.
I could probably give you 25 misconceptions that I hear on a daily basis but, for now, here are 5 common misconceptions regarding the UK R&D tax relief:
“You need to have paid corporation tax to receive an R&D tax credit cash payment from HMRC” – wrong! HMRC will help you supplement your development costs by paying you a tax credit equivalent to roughly 25% of your qualifying R&D spend (if loss-making).
“You need to have paid sufficient PAYE / NIC to receive an R&D tax credit cash payment from HMRC” – wrong! This requirement was dropped for accounting periods ending on or after 1 April 2012.
“I must have missed the boat as this is the first I’ve heard of R&D tax relief being relevant to a company like mine and we incurred our development expenditure in last year’s accounts” – wrong! We can apply claims retrospectively over the accounting periods that ended in the past two years.
“My company is too large to be eligible to make claim under the preferable SME R&D tax regime” – probably wrong! The SME definition for R&D tax covers probably 90%+ of the UK companies i.e Less than 500 employees plus either turnover of less than €100m or balance sheet total of less than €86m.
We don’t have an R&D unit with specialists in white coats – probably one of THE most common misconceptions – fear not, the R&D tax relief applies across all sectors and industries as technological advances can happen anywhere…
Please get in touch if you’d like to learn more – plus no doubt allow us to dispel the other 20 misconceptions…!
The Patent Box lands in the UK on 1 April 2013 as part of the government’s bid to make the UK a more attractive and globally competitive place to do business.
I won’t dish out the detail of the patent box right now suffice to say that it will provide a lower rate of UK corporation tax for patent income (10%). The main rate of corporation tax is currently 26% and will be 24% at the time of the introduction of this new relief.
The patent box is not new – other countries have successfully piloted similar schemes (some EU countries with more attractive patent box rates than our proposed rate) and now the US is taking a serious look.
We already have the R&D tax credit in the UK to reward companies engaged in pushing the envelope of knowledge in the areas of science and technology although some 12 years post intro there are still many companies that are struggling to get to grips with this increasingly attractive tax incentive and many who have yet to make a claim (much to my frustration!).
HMRC recently held a meeting outlining the new patent box relief (slides here). I am not the only one left thinking that once companies have gone to the hassle of calculating the profits attributable to this lower rate, there may not be much eligible for the special 10% tax rate!
This is a good initiative but yet again the implementation of this tax incentive leaves a headache for companies and their advisors. What are your thoughts on what you’ve seen so far?