Taxation

R&D Tax Credits: How the new HMRC 14.5% cash credit works

Posted on March 21, 2014 by Steve Livingston R&D tax credits 0

I’ve been getting some questions about the new 14.5% R&D tax credit rate announced in the March 2014 Budget Statement and how it works in practise.

So here’s a short video outlining how the effective rate of cash receivable from HMRC increases from 24.75% to 33% on qualifying spend – that’s one third of your R&D expenditure effectively being funded by the Government!

Plus how it could result in approx £8,000 of additional cash in your bank account for each £100,000 of qualifying spend if your SME is loss-making during its R&D phase.

Please leave your comments or feedback below or get in touch.

R&D Tax Credits – Don’t miss your claim!

Posted on October 3, 2013 by Steve Livingston R&D tax credits 0

Statistics from HM Revenue & Customs suggest that less than 0.25% of UK companies are taking advantage of this fantastic Government incentive which can apply to all companies across all sectors.

The R&D tax credit scheme has been in existence since 2000 and the tax relief available has got better and better year on year.

It is important that you investigate the potential for your company to make a claim – you could seek some professional specialist R&D advice here.

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

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

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?

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.
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.

HMRC R&D Tax Credits: How hard is it to file a claim?

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

(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:

What is the science or technological advance sought?
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?
How and when were the uncertainties actually overcome? Take us on your development journey. What worked and what didn’t?
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.

10 Year End Tax Planning Tips For SMEs

Posted on December 10, 2010 by Steve Livingston Tax N2K 0

You have the opportunity to structure your business finances in ways that preserve more of the wealth that you create. This takes advance planning. Don’t miss this opportunity.

To help, here are 10 pre-year end tax planning tips that entrepreneurs should be actively considering to reduce corporation tax, income tax and national insurance costs:

Don’t pay corporation tax at the highest rate of 29.75%. Calculate your full year budgeted profits as soon as possible so that you plan around this rate. If you are a standalone company and your estimated taxable profits exceed £300,000 (but are less than £1.5m) then you fall into what’s called the corporation tax ‘marginal rate.’ This is not a good place to be. This rate is higher than the rate of tax applied to large companies (with profits in excess of £1.5m) who pay tax at 28% and much higher than the 21% rate your company would otherwise pay if you kept profits below the marginal band. If this applies to you, then you need to consider tax planning ideas to reduce your corporation tax payable – see further below.
Make a pension contribution from your company into your (and possibly your spouse’s) pension fund. I am not going to go into the pros and cons of pensions and the detail of the recently introduced (and hideously complex) anti-forestalling provisions that currently apply for ‘super earners’ (broadly those with personal income of £130,000+), suffice to say that pensions can play an important role in year end planning for owner managed businesses. The benefit of pensions is that income tax relief is received at the individual’s highest rate of income tax. Certain restrictions apply for ‘super earners’ and new rules will be coming into force from April 2011, however, where implemented carefully, pension planning allows for a corporation tax deduction in the company and no income tax or national insurance payable by the owner managers. Pensions can also be an important lever in managing the company taxable profits e.g. if hovering above the £300,000 standalone company profit watershed. And don’t forget you must pay the pension contribution by the year end in order for it to be tax deductible in the company in that period – so don’t leave it to the last minute!
Optimise the tax on your remuneration. Generally, a small salary (within the personal allowance – so no income tax or national insurance is due) will have been paid during the year with regular dividends to cover living expenses. Spouses, who ideally take an active role in helping run the business, can receive a small salary and dividends (subject to shareholdings) to maximize the use of both husband and wife personal tax allowances. With the year end approaching, now is the time to consider whether a final bonus or dividend should be awarded depending on available distributable profits, taxable profits and how much needs to be left in the business for future reinvestment etc. There are normally a number of factors to consider in making final awards of cash from the company, therefore it is important to crunch the numbers. Normally, a dividend will be the most tax efficient means of extracting profits for most business owners (up to the £150,000 personal income limit and 50% additional tax rate – see further below). Care should be taken in awarding dividends to spouse shareholders as HM Revenue & Customs still have their eye on husband and wife companies despite having lost a landmark case on this issue related to maximising both spouse’s income tax allowances. Some demonstrable activity in the business by both spouses is therefore recommended to mitigate this risk.
Watch the 60% marginal income tax rate for income over £100,000. Total personal income of £100,000 is a new watershed for business owners as income received between £100,000 to £112,950 attracts a marginal rate of 60%! This is due to the personal allowance being phased out for income above £100,000. So if your total remuneration package is likely to be around this area, you might be well advised to limit your income to £99,999 to avoid this horribly expensive marginal rate.
Watch the 50% additional rate for ‘super earners’. For those successful entrepreneurs with earnings in excess of £150,000, getting the right balance of remuneration is even more important as income tax is levied at 50% on salary or bonuses compared to 36.1% on dividends (a 25% increase in tax on salary income is matched (or not?!) by a 44% increase in dividend tax rate – work that one out?!). So rather than take a dividend from the company beyond £150,000 total income, business owners could consider taking a loan from the company and the company paying the due tax at a rate of 25% on the loan – something akin to what the shareholder would have paid on a dividend. Note that there could also be benefit in kind tax charges where no interest is paid on the loan but this could still work out to be the cheaper overall option.
Optimise the timing of dividend and bonus payments for cashflow and tax rates. Dividends and bonuses are taxed on business owners on a receipts basis. If your income is already high for the 5 April 2010/11 tax year then you could defer paying out a dividend until 6 April 2011 so that it falls within the following year’s tax allowances and limits. Also, you can accrue a bonus in the 31 December 2010 accounts and don’t have to physically pay it until 30 September 2011 but you still receive the corporation tax deduction upfront. This gives a useful cash-flow advantage and the bonus timing is applicable for all employees i.e. not just business owners.
Plan your spend on capital items to get tax relief quicker. Expenditure on computer equipment, desks, chairs etc attracts a write off against tax up to £100,000 spend per year. This reduces to £25,000 from April 2012. Make sure you bring forward any expenditure to reduce your taxable profits especially if the company profits are hovering around the standalone company £300,000 mark.
Get tax deductions now for provisions against stock and debtors etc. Consider the valuation of any stock or debtors at the year end and make specific provisions where the likely recoverable value is less than the original amount recognised. Provisions against specific items (on a line-by-line basis) are tax deductible for corporation tax purposes.
Claim loss carry backs as soon as possible to get refunds. If you have a forecast tax loss then you can carry this loss back to obtain a refund from HM Revenue & Customs of the corresponding amount of tax suffered in the preceding accounting period. You may wish to get your skates on with the year end work so that you can promptly file the accounts and tax return and get the cash back as quickly as possible.
Don’t get time barred from lucrative tax incentives. Review available tax incentives such as R&D tax credits, capital allowances on fixed asset expenditure, loss carry back claims etc as the majority of such tax breaks have a 2 year time limit for you to be able to claim them with HM Revenue & Customs. So, for example, many available tax incentives for the year end to 31 December 2008 will be time barred from 1 January 2011.

If you would like more ideas for growing your business and structuring your finances so that you keep more of the wealth you create, then please join the mailing list in the side-bar.