Tax credit

How to claim enhanced Research and Development (R&D) Tax Relief?

Posted on February 24, 2016 by R&D tax credits 0

The UK Research and Development (R&D) Tax Relief Scheme is delivered via HMRC’s corporation tax filing system.

After each financial accounting period, a company is required to prepare statutory accounts along with a corporation tax computation.

The corporation tax computation calculates the tax liability of the company for the period (if profitable) based on the statutory accounts. If pre-revenue and / or in development mode then the corporation tax computation will calculate the company’s losses for the period.

The R&D tax claim figure is entered into the corporation tax computation and CT600 corporation tax return to claim the notional enhanced R&D tax deduction.

The corporation tax return and supporting computation is filed online with HMRC. It is recommended that the company also prepares a report outlining the nature of the R&D work and why / how it satisfies the HMRC definition of qualifying R&D plus detailed supporting claim calculations – or you could get an R&D tax specialist to help :)

If profitable, this will result in a reduction in the corporation tax payable.

If loss-making, the company can elect to surrender the enhanced tax loss for a tax credit payment from HMRC. Or it could elect to carry the enhanced tax loss back twelve months (if profitable) or carry forward to utilise in future periods.

HMRC aims for a 28 day turnaround time in reviewing and processing R&D tax claims.

If you would like to learn more, why not subscribe for our R&D Tax Relief Training Course:

Summer Budget 2015: Key tax changes for entrepreneurs

Posted on July 15, 2015 by Tax N2K 0

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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.

EIS restrictions

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.

R&D tax credits

No significant changes announced for R&D tax relief aside from a restriction aimed at Charities and Universities to prevent them from claiming the R&D tax relief on work subcontracted to them. This restriction takes effect from 1 August 2015.

Buy to let landlords

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.

Pension changes

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.

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Fancy an extra 5% on your R&D tax relief?

Posted on April 30, 2015 by R&D tax credits 0

The UK R&D tax credit incentive scheme continues to get better and better (have I said this before!?!)

From 1 April 2015, SMEs attract an uplift on their qualifying R&D expenditure of 230% (up from 225%). This means that in cash terms the tax credit is now worth 33.35%!

So 1/3rd of your expenditure on staff carrying out R&D project work could effectively be subsidised by this generous UK tax incentive – that’s up from c25% just over a year ago.

If you’ve yet to take a look at this incentive – especially if you are a developer, digital agency, creative or engineer or manufacturer – I urge you to do so. You can always get some help from some friendly folk who are R&D tax specialists :)

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R&D tax credits: Key changes from March 2015 Budget Statement

Posted on March 30, 2015 by R&D tax credits 0

Here is a short summary of the key changes related to the UK R&D tax credit incentive as announced in the March 2015 Budget statement.

Changes include:

  • An increase in tbe SME rate of super-deduction from 225% to 230% from 1 April 2015
  • An increase in the Large company scheme “above the line” credit from 10% to 11% from 1 April 2015
  • Introduction of an advance assurance process from Autumn 2015 for those smaller companies making their first R&D tax claim and seeking some certainty as to eligibility
  • Speedier processing, increased publicity and more…

 

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Two common R&D tax credit stumbling blocks for start-ups

Posted on November 21, 2013 by R&D tax credits 0

Solar cell technology based on organic materials

Picture the scenario: a new technology startup. The founders invested £250,000 into the development of some new technology. The company is burning through the cash at a rate of knots and so they’re looking forward to recouping a chunk of it by claiming R&D tax credits under the ‘R&D tax credit scheme’ – something they’d heard about somewhere not long ago… In their minds, the tax credit had already been ear-marked for the next phase of work.

But two HUGE (yet surprisingly common) issues were about to put a hole through the R&D tax claim:

  1. Most of the costs were subcontracted to third party developers. This is fine in principle but under the R&D tax incentive rules such costs are restricted to 65% of the costs incurred (where the subcontractor is unconnected). The logic here is to eliminate the ‘profit’ element made by the subcontractor on the R&D work to get closer to an employee scenario. So here, in one swoop, almost half of the qualifying R&D costs and therefore claim had gone…!
  2. The company’s accounting period ended on 31 March 2012 and, for periods ending before or on this date, any R&D tax credit is capped by the PAYE / NIC suffered by the company in the period. This company had no employees (they’d subcontracted out all of the work) and had paid themselves no salary so there was £nil PAYE liability and therefore £nil repayable R&D tax credit. If the accounting period had ended just one day later, the company would have fallen within revised rules whereby the PAYE / NIC cap falls away. Ouch.

Of course, we should not lose sight of the fundamental issue of whether the company’s activities qualify for R&D tax purposes in the first place? If so, the company could still get a good result overall (a significant enhanced loss carried forward in the 31 March 2012 period end to offset against future trading profits and a potential repayable tax credit on qualifying activities and costs incurred in its next period ended 31 March 2013 and onwards) – just not perhaps as good as the founders had understood from the outset.

Fortunately, given the relaxation in the rules for accounting periods ending after 31 March 2012, the PAYE cap is no longer a problem – although it can still bite for retrospective claims (which can be made until 31 March 2014).

This is often a problem with tax incentives – there are almost always traps for the unwary…

Image: BASF – The Chemical Company via Compfight

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North West SMEs claim an average £32,000 R&D tax relief

Posted on September 13, 2012 by R&D tax credits 0

Salford Quays & BBC MediaCity UK - The Tram

Latest HM Revenue & Customs figures reveal that a total of £52m tax relief was claimed in the North West under the UK R&D tax credit scheme in 2010-11.

The £52m is spread over 985 claims giving an average claim of £53,000 (interestingly, this compares with an average claim of just £19,000 in London!), although this includes large company claims which can be significant. However, even when claims by large companies are split out North West SME companies claimed an average of £32,000 in tax relief.

This is good news for local North West companies and the number of claims made was 3rd highest overall after the South East (1) and London (2).

Overall, out of the almost 5 million SMEs in the UK only 8,140 R&D tax claims were made in 2010-11 and less than 1% of UK SMEs have made a claim for enhanced R&D tax relief since its introduction in 2000. I find this statistic staggering.

What should you do now?

  1. If you haven’t already reviewed your company activities to determine whether you have a potential R&D tax credit claim you should do this asap – there is a timelimit for backdating claims.
  2. If you have made R&D claims, compare your claims with the averages noted above and if your claim was for less than £32,000 consider whether it is worth getting a second opinion – you can amend claims if they are still within the two year timelimit.
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HMRC R&D Tax Credits: How hard is it to file a claim?

Posted on February 23, 2012 by R&D tax credits 1

HMRC R&D Tax Credits - How to file a claim

(Updated: July 2019) So you’ve had a good look at the activities of your company and think you might have a qualifying claim for Research and Development (R&D) Tax Credits – but what next?

HMRC R&D tax credits can be successfully claimed by UK companies across all industry sectors – from builders to engineers to manufacturers to technology firms to, of course, R&D companies.

There are 4 key steps to making a successful claim for UK R&D tax credits:

1. Prepare a short report that outlines the nature of the qualifying R&D activities for UK tax purposes

Firstly, breakdown the project(s) work carried out in your company over the past two years into potential qualifying and non-qualifying projects.

Consider which projects you feel pushed the boundaries of knowledge or capability in your field (not just for you as a company).

For example, you may have found yourself at point A in a new project and wanted to get to point B in terms of say, a new or improved product or service but had no idea how to get there? You therefore incurred time and costs engaging competent professionals in your sector seeking to find potential solutions.

You may have hit roadblocks along the way and therefore incurred commercial and financial risk.

Don’t forget that aborted projects can also be included in a claim.

If so, these can all be pointers towards potentially qualifying R&D activities for tax…

You should aim to build your supporting R&D report around four key headings:

  1. What is the science or technological advance sought?
  2. What were the scientific or technological uncertainties involved in the project i.e. why was it that standard or commonly accepted approaches or methodologies wouldn’t work in your case?
  3. How and when were the uncertainties actually overcome? Take us on your development journey. What worked and what didn’t?
  4. Why was the knowledge being sought not readily deducible by a competent professional in your field? It helps here if you can provide a little info on the background and experience of the team that you had involved in this project.

There are specific HMRC guidelines for claims made by companies in the field of software development including some example case-studies of qualifying projects for R&D tax purposes.

HMRC deals with R&D tax credit claims via its specialist R&D Units.

2. Quantify your R&D tax qualifying costs

Qualifying costs for R&D tax purposes fall within 3 main categories:

(i) Emoluments paid to staff engaged in the qualifying R&D (this covers salary, employer’s NIC and employer’s pension costs).

Make a table (say in excel) listing all of the staff engaged in the R&D project(s) and their total emoluments for the year. Then apply a percentage based on the number of days that they were directly engaged in the R&D project work (v their total working days).

Ideally your team maintain time-sheets but if not, an estimate based on diaries etc will suffice. Total these costs up and this will likely form the bulk of your claim.

(ii) Subcontractors / Externally provided workers – These are third parties that you subcontracted elements of the R&D work to or workers provided by a staff provider e.g. agency, in the latter case.

These relationships can sometimes be quite tricky to classify for R&D tax credits purposes and the paperwork will often be key.

(iii) Software / Consumables can also be included in a claim.

These will typically be off-the-shelf software that you had to buy to use within the R&D process (e.g. software licences).

Or bits of consumable kit or parts if you are developing physical products or prototypes. Really anything that is used up as part of the process or discarded.

Any capital expenditure e.g. on PCs bought for the process, are not likely to be consumables for these purposes; rather these would attract 100% tax write off under the R&D scheme (if not already securing 100% writing down allowances under the normal Annual Investment Allowance available to all companies).

A percentage of your power and water costs can also be claimed.

The total of the above costs will form the basis for your claim.

3. Apply the R&D tax uplift or enhancement to the total of the costs to calculate your R&D claim.

The enhancements set out below apply for UK SMEs which will cover the majority of readers of this site as the SME thresholds for R&D are huge (less than 500 employees and either turnover of less than €100m or a balance sheet total of less than €86m).

From 1 April 2015, the enhancement is 230% on qualifying costs.

So say your total qualifying costs (from points 1-3 above) in your financial accounting period ended 31 March 2019 are £150,000, then under this R&D tax incentive you will receive an additional £195,000 deduction against your taxable profits for the year. This is for company corporation tax purposes only i.e. it is a ‘notional’ tax deduction only that does not reduce your profits for accounts purposes.

This means that you have less profits subject to corporation tax so it reduces your bill.

Taking this a step further, say your adjusted taxable profits (but pre-R&D enhanced deduction) are £125,000, then this additional R&D adjustment will turn an otherwise likely corporation tax bill of £23,750 into a tax loss of £70,000. Not only does this eliminate the c£24k tax bill, but it potentially results in a tax credit rebate of £10,150 from HMRC (at 14.5%)!

Now you can hopefully see the value of investing some time to pull together an R&D tax credit claim!

You can go back to accounting periods ended in the past two years to make or amend claims – so its not too late to revisit and amend previously filed corporation tax returns.

4. How to file the R&D tax credits claim with HMRC

The R&D tax credit claim is included in your corporation tax return for the relevant accounting period. Corporation tax returns are filed online. Your R&D report and accompanying calculations can be filed online via the HMRC filing portal. They will be passed internally to the relevant HMRC R&D Unit for processing.

HMRC aims to process all R&D tax credit claims within 28 days of filing.

Getting the best R&D tax result for you

There is more work to be done before your R&D tax claim is filed with HMRC. This work is to determine the optimum treatment of the claim for your specific circumstances.

For example, rather than reclaim the cash tax credit at 14.5%, it may work out better for you to carry a resulting loss back to the previous profitable accounting period. Or carry forward to future periods if you expect to return to profitability quickly.

This is because the net cash recovery might be higher than simply claiming the in year tax credit.

You can attempt to make a claim yourself or you could try using HMRC’s new R&D pilot programme although you may find you achieve a better result by seeking some professional help from R&D tax credits specialists.

Either way, I hope that the above is helpful and we see more R&D claims being filed by UK companies!

 

You can find a more detailed R&D Tax Credit Guide at our sister site: IP Tax Solutions.

Budget 2011 supports digital, technology and creative businesses (mostly!)

Posted on March 24, 2011 by Tax N2K 0

Yesterday’s Budget speech provided largely good news for entrepreneurs in the digital, technology and creative sectors.

George Osborne had promised an “unashamedly” pro-business, pro-growth and pro-aspiration Budget and, although it might be over-flattering to suggest that he achieved this, he certainly made some positive inroads toward addressing some of the roadblocks facing early-stage startups and fast growth companies.

  1. The headline grabber was that the UK is set to have one of the lowest company (corporation) tax rates in the G7. To achieve this Osborne accelerated the previously promised rate cut by introducing a 26% standard rate from 1 April 2011. This will be followed by a series of 1% cuts until it reaches 23% by 2014. This is a further 1% cut to what we were expecting.  Good news if you’re a big company but of little consequence if you’re a startup or SME – as the standard rate only applies for single companies with taxable profits over £1.5m. Unfortunately there was no 2% cut for the small companies rate that applies for most startups and SMEs – the rate will be 20% from 1 April 2011 as previously promised. Still, 20% isn’t bad and if you’ve yet to incorporate your business into a company, it may well be worth crunching the number to see if tax savings could be made.
  2. R&D tax credits get a whole lot better – Research and Development Tax Credits are a key tax incentive for many companies in the tech and wider sectors so it was great news to see Dyson’s recommendations followed and in fact improved upon. Most startups and fast growth companies are already entitled to claim a further 75p tax deduction for every £1 they spend on qualifying R&D activities (primarily comprising relevant staff salary costs), however, it was announced that from 1 April 2011 companies can claim an additional £1 tax deduction for every £1 spent (i.e. a 200% tax deduction) and this set to go up to £1.25 for every £1 spent from 1 April 2012! There are also plans to remove the requirement for the company to have generated sufficient PAYE to cover the cash repayment, a requirement that has been a key roadblock for many companies, particularly start-ups, in making repayment claims. How many companies have significant PAYE bills in the early stages? Not many. There are also plans to abolish the de minimis limit of £10,000 qualifying R&D spend before you can make an R&D tax claim. These changes should open the doors to more companies being able to access cash at an earlier stage than was previously possible. All good news and if you haven’t looked at this for your business, please drop me a line.
  3. Entrepreneur’s Relief lifetime allowance doubled from £5m to £10m for sales after 5 April 2011. For all the blood, sweat and tears put into building your business it is encouraging to know that you will be able to shelter £10m of your gain at a tax rate of just 10% – that’s a potential £1.8m tax saving compared to applying the general CGT rate. I would have liked to have seen a relaxation in the qualifying criteria to assist employees with less than 5% shareholdings, but still, in theory, it will be possible to shelter gains of £200m at just 10% if structured correctly. Mouth-watering huh? At the very least, it is important that you ensure that you are maximising this relief by allocating shareholdings at the optimum levels although care must be taken as there are many pitfalls for the unwary – remember, there is potentially £1.8m of tax at stake….(a subject for another post – or drop me a line).
  4. Enterprise Investment Scheme (EIS) is made much more attractive for investors in startups and fast growth companies. Accessing funding for business has been tough of late and we are increasingly seeing the private business angel networks as well as family and friends stepping into the fray to lend financial support where possible. EIS allows investors in qualifying businesses to obtain income tax relief as well as capital gains savings in relation to investments in startups and fast growth companies. The income tax relief will be increased from 20% to 30% from 6 April 2011 and we will see further sweeping changes in 2012 to increase the amount that can be invested and the breadth and scope of the relief.
  5. The ‘Patent Box’ is on its way! As previously announced, the UK will be following other countries in introducing a lower rate of corporation tax (10%) for patent income to encourage investment in new technologies and methodologies. Although likely to be of most interest to life science and pharma companies, it will be worth keeping an eye on this relief as more details emerge in readiness for its introduction from 1 April 2013 to see if it can be applied to tech companies more generally. As currently drafted, the rules will be too restrictive for most tech companies as few derive significant income from patents but I am hopeful that there will be a widening of scope to catch broader intellectual property classes as it undergoes consultation.
  6. 21 Enterprise Zones to be introduced (including in Greater Manchester and Liverpool) and £100m investment in Life Sciences and Technology with £10m to be invested in Daresbury Innovation Park. Creating clusters of innovative businesses builds support networks and knowledge transfer leading to fast growth businesses. A win-win.

These were the headline announcements relevant to digital, technology and creative businesses – we await the draft legislation which may throw up some anomalies or slight tweaks and I’ll keep you all posted.

Please drop me a line via the contact form on the about me page or my email address is in the sidebar – otherwise, please air your views below.

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R&D tax credits get thumbs up in Tory Technology Manifesto

Posted on March 17, 2010 by Tax N2K 1

Hot on the heels of the Ingenious Britain report by James Dyson, the Conservatives have released a disappointingly limp Technology Manifesto. Although its key aims build on many of the promising ideas set out in the Tory commissioned Dyson report – in aiming to position the UK at the forefront of global technology and science based exports – it unfortunately lacks any great detail (I’m all for brevity but 11 pages?!) plus it appears to veer off track in many parts (not sure how publishing data like….public sector salaries over say £150k etc is going to put us at the leading edge of global tech commerce? Worthy aim, wrong manifesto).

To its credit it promises to implement many of the proposals set out by James Dyson as soon as possible which sounds promising plus it singles out R&D tax credits as being retained and simplified – although unfortunately no mention of increasing the tax relief to 200% as Dyson recommended (although this is still a vast improvement given the rumour that the Conservatives were, up until very recently, considering abolishing research and development (R&D) tax credits altogether in an effort to simplify the UK corporation tax regime.

There is also talk of implementing a superfast broadband network of 100mbps that is some 50 times faster than Labour’s proposed super broadband network but the detail on exactly when and how this will be achieved is also notable by its absence.

Overall, I am delighted to see that the Conservative party is choosing to focus its efforts on pushing the boundaries in making the UK a leading global technology and science friendly location to do business, we could just do with a little more detail – as we’re not the only ones with this lofty ambition.

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