Month: August 2020

How can R&D Tax Credits benefit your business?

‘What are R&D Tax Credits?’ It’s a question that should be asked more often in the world of business, especially since it’s an incentive to encourage innovation in UK businesses – a cash injection for any research and development that a business has completed.

Sadly, however, unless you’re a business supported by a team of accountants or business advisors, you’re unlikely to know just how much of a cash injection you could be receiving.

If you’re an active scroller on social media, or you like to keep up with the news, you’ll likely be aware that a recent report found manufacturers especially could unknowingly be missing out on this cash injection – and we’re talking thousands of pounds!

But it’s not just manufactures, and we’re here to take a look at how all businesses can take advantage of the rewards for research and development and continue their innovative work.

 

R&D Tax Credits defined

Research and Development Tax Credits are an incentive developed by the government in a bid to encourage and reward UK businesses for continuing innovation – a vital factor in the strength of the economy.

Whilst they’re available to businesses of all sizes who actively participate in research and development, there is certain criteria which any claimant must meet.

 

To make a claim under the R&D SME Regime

The finance tests must be met: 

  • Employ less than 500 employees, and
  • Have a turnover of less than £100m, or
  • Have an £86m balance sheet.

If the above criteria are met, the project for which businesses are claiming for will then need to be considered. Some of the most popular projects include:

  • Development of processing and handling techniques.
  • The design, testing and trialling of prototypes and demonstration plant.
  • Scaling up of production processes
  • Adaption to include new or alternative materials – driven by legislation, environmental aims or operational efficiency.
  • Integration of new technology with old systems.

In summary, for an activity to qualify it must be technological or scientific in nature to qualify.

It’s important to note that if the project in question has received state aid, subsidies or grants, then that project won’t be considered via the SME Regime scheme. 

 

To make a claim under the RDEC Regime

If you’re a business who doesn’t meet the criteria above, don’t worry. It doesn’t necessarily mean you’ll miss out. It’s a little more complicated, and a little less beneficial, but you could still claim 9.7% cash back under the RDEC Regime.

Again, you’ll need to discuss the project itself if you’re looking to claim via this regime.

 

How do R&D Tax Credits work?

As we mentioned, the whole point of R&D Tax Credits is to reward those businesses innovating to help the economy and individuals thrive, so it’s no surprise that the schemes are centred around financial gains.

Let’s explore.

 

Small and medium sized enterprises (SME) R&D Relief

SME R&D relief allows companies to:

  1. Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction: and/or
  2. Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss

For example, let’s assume a company has incurred £100k of R&D qualifying expenditure:

£’000
The net profit before tax is 250
The tax due is (see below for info) 22.8
The profit after tax would be 227.2

 

The corporation tax computation would therefore be:

£’000
Net profit before tax 250
Less R&D relief 130 (130% in addition to what has been claimed)
Adjusted profit before tax 120
Corporation tax at 19% 22.8

 

Research and Development Expenditure Credit

This replaces the relief previously available under the large company scheme.

Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects, and it can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company.

The RDEC is a tax credit which used to be 11% of your qualifying R&D expenditure up to 31 December 2017, but in 2018 it was increased to:

  1. 12% from 1 January 2018 to 31 March 2020, and 
  2. 13% from 1 April 2020

Looking at a typical scenario then, let’s assume that £100k of R&D qualifying expenditure has been incurred.

£’000
The Net profit before tax would be 250
13% RDEC on expenditure would be 13
The adjusted profit before tax would be 263

                                                                

The corporation tax computation would therefore be:

£’000
Net profit before tax 263
Corporation tax at 19% 50

                                                                                                                                                                                                                                                                    

And the tax payable:

£’000
Corporation tax due 50
Less tax credit (13)
Corporation tax payable 37

 

More information on R&D Tax Credits can be found here https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief, but if you’d prefer a friendly chat with one of our experts, please get in touch.

 

Author: Rajeev Dewedi

How much do you know about quarterly Corporation Tax payments?

Written by Michael Gough, Senior Accountant at Shenward, Leeds.

For small companies, corporation tax is payable by nine months and one day after the end of your accounting period. For example, if your company’s year-end is 31 December 2019, the corporation tax, if you are a small company, would be due by 1 October 2020. 

You might not be aware but ‘large’ companies as defined by HMRC are required to make quarterly Corporation Tax payments. It is noteworthy that HMRC’s definition of a ‘large’ company is not the same as the definition set out in the Companies Act 2006. 

Put simply, if you’re classed as a large company by HMRC – your company’s profits for an accounting period are expected to top £1.5 million a year – you must pay the tax due electronically and in four instalments.

Confused? Let’s explore.

HMRC characterise a large business as one with an annual profit of between £1.5 million and £20 million. 

Under Corporation Tax self-assessment large companies must pay in quarterly instalments if they expect their annual profits to be above the £1.5 million threshold. This threshold is known as the Upper Relevant Maximum Amount (URMA) and the current rate of Corporation Tax is 19%.

Most companies won’t fall within the quarterly payment regime, but the directors of fast-growing businesses need to be aware of their obligations as their companies expand and profits rise.

There are exceptions, of course, and that is where taking specialist advice from your accountant is important – and can save you time and money. Tax rules can be complex, every business is unique, and it pays to have an expert on your side.

To help get you started, we’ve answered some of the most frequently asked questions regarding quarterly Corporation Tax.

What are the quarterly Corporation Tax exceptions for growing companies?

A company doesn’t have to pay by instalments for an accounting period even if profits go above £1.5 million if:

  • The amount of its total liability for the accounting period is less than £10,000, or where the accounting period is less than 12 months;
  • Its profits for the accounting period do not exceed £10 million and at any time in the previous 12 months it did not exist or did not have an accounting period; or for any accounting period in the previous 12 months either its annual rate of profit did not exceed £1.5 million or its annual rate of tax liability did not exceed £10,000.

How does having a group of companies apply to paying quarterly Corporation Tax?

Where a company owns at least 51% of other companies in a group the URMA is calculated by dividing £1.5 million by the number of companies in the group. This includes the parent company so if a company has another three in the group then the URMA is divided by four.

Group companies can choose to offset an amount overpaid by one company against an amount unpaid by another company in the group.

HMRC also offers Group Payment Arrangements, which allow groups to make instalment payments on a group-wide basis. You can nominate one company in the group to pay the instalments on behalf of the group, rather than company by company.

When do quarterly payments have to be made?

Four equal instalments should be paid for a 12-month accounting period, two within the 12 months and two afterwards.

The dates are: 

  1. Six months and 13 days after the first day of the accounting period
  2. Three months after the first instalment
  3. Three months after the second instalment (14 days after the last day of the accounting period)
  4. Three months and 14 days after the last day of the accounting period.

For example, using the same example as earlier, a company with a year-end of 31 December 2019:

  1. 14 July 2020
  2. 14 October 2020
  3. 14 January 2021
  4. 14 April 2021

How are quarterly payments worked out?

A company must estimate its current tax year liability, taking into account net reliefs and set offs, and make payments based on that assessment. The estimate is just that, an estimate, and will vary over time. 

Companies are allowed to top-up payments at any time. It may also be possible to claim back over-payments if they shouldn’t have been made or were shown to be excessive. Alternatively, HMRC will set any over-payment against future liabilities.

What should growing companies be aware of? 

If a growing company is defined as a large company for two consecutive years, the quarterly instalments payments regime will apply for the second of those years. If for example, a company’s accounting period ending on 31 December 2019 is the first accounting period where profits exceed the URMA, it will be required to make payments on account for the accounting period 31 December 2020. Its tax payments will be as follows:

  1. First payment on account (2020): 14 July 2020
  2. Corporation tax liability (2019): 1 October 2020
  3. Second payment on account (2020): 14 October 2020
  4. Third payment on account (2020): 14 January 2021
  5. Fourth payment on account (2021): 14 April 2021

By 14 October 2020, the company will have paid its corporation tax liability for 2019 and potentially up to 50% of its upcoming tax liability for 2020. Therefore, it is absolutely essential that companies plan ahead when budgeting for cash flow. 

How should payments be made?

All payments must be made electronically. This can be by direct debit, debit card, credit card, company credit card or your own bank or building society’s internet banking service.

Alternatively, you can use BACS direct credit, your own bank or building society’s telephone banking service, CHAPS or Bank Giro.

What are the penalties for failing to pay Corporation Tax?

HMRC may charge penalties if a company deliberately fails to pay quarterly instalments or doesn’t pay enough. The amount will vary. Interest can also be charged on overdue or under-paid instalments.

Tax can be complex so if you need help with Corporation Tax please speak to one of our experts here Shenward – your leading independent firm of accountants and business advisors. Email michael@shenward.com

Accounting for government grants: What your accountant needs to know

Across the industry, accountants are beginning to prepare year-end financial statements for clients whose accounting periods end on or after 31 March 2020.

Resulting from the various government support made available due to the COVID-19 pandemic, businesses are likely to have received grants, whether from the local authority/self-employed grants and/or in respect of furlough claims. 

The accounting and tax treatment of such receipts may become an afterthought, but it is worth considering at the earliest opportunity in case budgeting needs to reflect increased tax liabilities. 

We’ve prepared some useful tips that will help sole traders, partnerships and limited companies understand the accounting and tax treatment when preparing financial statements.

Local Authority Grants

Like thousands of people across the UK, you may have received local authority grants, whether that be a Small Business Grant, a Retail Leisure & Hospitality Grant or a Discretionary Grants. 

Whichever grant you received; accountants will need to report this in your financial statements, ordinarily as other income which would then be taxed in the year in which received. 

However a fundamental accounting concept is the matching basis therefore it is possible, if your year-end was shortly after the grant receipt in your bank account, that you have not yet had the opportunity to reflect how the funds will be utilised in your business.

 It would therefore prudent to report the grant in your statement of financial position as a deferred income/long term liability. This means that the grant has been reported in the financial statements but as it has not yet been spent, it is deferred to the next accounting period. It then enables the grant receipt and the related costs to be matched thus having a negligible/nil tax impact, smoothing cash flow requirements during the ongoing pandemic.

For your accountant to correctly account for the grant, you’ll need to provide evidence of what the additional funding was used for. If you use a cloud-based accounting system such as KashFlow, this should be a smoother process. But if not, preparing a list to send to your accountant will help them offset the expenses against the grant.

Self Employed Income Support Grant

As at today, 3 August, accountants have not yet received confirmation from HMRC as to when the SEIS grants will be taxable. However, here at Shenward, we fully expect any SEIS grant received to be taxable during the 2020/21 financial year.

If you were in receipt of the SEIS grant, you’ll need to provide your accountant with exactly how much was received, bearing in mind that there are 2 grants, the second window opening from Monday 17 August 2020.

Job Retention Scheme (CJRS) Grants

The coronavirus job retention scheme is one of the most complex schemes within the government support packages provided throughout the COVID-19 pandemic. With flexible furlough and short-term furlough being part of the equation, payroll records will look a lot different to the ones you provided to your accountant in the last financial year.

No matter how complex they are, one thing is for sure; any furlough claims will need to be reported as other income within your financial statements and will be subject to tax and national insurance (for sole traders and partners). 

Eat Out to Help Out Grants

Eat Out to Help Out will operate on Mondays to Wednesdays through the month of August 2020. Its purpose is to incentivise customers to eat in restaurants or other eating establishments by giving them a discount which businesses can then claim back from the government. 

The scheme is UK wide and customers will be able to see who is taking part on GOV.UK. The scheme will drum up custom on quieter days of the week.

HMRC has issued extensive guidance on various examples how to calculate the 50% voucher, capped at £10 per head. However, we draw registered businesses of the scheme to the following accounting and tax points:

  1. Claims made will form part of sales and ultimately profit and will be subject to tax and national insurance (for sole traders and partners) as normal
  2. Where restaurants or other eating establishments are registered for VAT, this will be payable on the undiscounted bill, albeit at 5% for food and non-alcoholic drinks

Example

A group of six diners (4 adults and 2 children) spend £90, including £18 on alcoholic beverages. 

Bill before discount £90

Amount spent on alcohol £18

Amount discount can be applied to £72

Discount (50%, capped at £10 per head) £36

Bill after discount is applied £54

Total amount the business can claim £36

VAT will be due at 20% of the alcohol amount of £18, being £3. 

VAT will be due at 5% on the full undiscounted amount of £72 for the rest of the meal, being £3.43.

Total VAT due being £6.43. As a comparison, if VAT was maintained at 20%, the VAT due would have been £15.

Businesses will be required to retain sufficient evidence to support any claims made e.g. daily gross takings reports (e.g. Z reads and individual meal receipts). 

Further information is available below: https://www.gov.uk/government/publications/get-more-information-about-the-eat-out-to-help-out-scheme/get-more-information-about-the-eat-out-to-help-out-scheme

We appreciate the complexity of this year’s financial statement preparation, so please do get in touch with one of our friendly experts if you’d like to discuss your businesses’ position.

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