You might have received an Employment Allowance letter in the post this month and be left wondering what is it is.
If you’re feeling unsure as to what it is, why you’re eligible and what it involves, we can help.
Our quick guide gives you all the information you need on the £5,000 Employment Allowance for small business owners.
What is Employment Allowance?
Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £5,000.
The allowance was put into place to support small businesses with their employment costs.
Each time you run your payroll you’ll pay less employers’ Class 1 National Insurance until the £5,000 allowance has gone, or the tax year ends. It is not a lump sum amount paid to an employer or business.
How do I know if I’m eligible to claim?
In order to be eligible for Employment Allowance you’ll need to tick a few boxes:
You must be registered as an employer
Specifically, a sole trader, limited company or partnership that has employees
You can also be registered as a limited company that employee only directors, where two or more directors earn more than the secondary threshold for Class 1 NI contributions
Employers’ Class 1 National Insurance liabilities need to be less than £100,000 in the previous tax year
Don’t include off-payroll workers in your calculations, they don’t count towards the £100,000 threshold
Firstly, you need to note that the £5,000 allowance applies to your business, not to individual employees.
If you have more than one payroll, you can only claim against one of them. Similarly, in groups of companies or where there is common control across multiple companies, the allowance can only be claimed in one company.
You can claim at any point during the tax year as part of your Real Time Information submission to HMRC and you can start utilising your allowance as soon as you submit the claim.
Note, claiming Employment Allowance isn’t an automatic process – you’ll need to tell HMRC that you qualify and want to claim. You’ll also need to claim every tax year to ensure you’re still eligible.
Tip – you can backdate claims for four previous tax years. So, if you haven’t claimed and think you’re entitled to claim, it’s worth doing now.
Seeking support?
Here at Shenward we help our clients with claiming their Employment Allowance where it is tax efficient to do so. If you want assistance on making your claim please contact us today:
+44 (0)1274 722666
hello@shenward.com
Everything You Need to Know About Claiming Tax Relief for Research and Development
R&D Tax Credits are a form of tax relief set up by the UK government to encourage businesses to aid growth of the UK economy by investing in research and development. The idea behind the scheme is that businesses get rewarded for their innovation efforts, finding new solutions to their biggest challenges and improving/enhancing their products and processes. The desired result is that this will then accelerate growth, creating more job opportunities and increasing the value of the UK economy.
How R&D Tax Credits Work
R&D Tax Credits work by allowing businesses to make a claim to HMRC to obtain a tax relief for the money they have spent on qualifying research and development projects. However, R&D Tax Credits are more than just a standard tax relief – the amount of your approved claim can be paid to you in three ways:
cash payment,
deduction applied to your year-end Corporation Tax bill,
or a mixture of the two.
It is worth noting that the way in which you receive the relief is based on whether you are profit-making or loss-making. If you have made a loss, you can claim a cash payment. If you’ve made a profit, you can offset the value of your approved claim against your Corporation Tax bill. If the value of your claim is more than the CT due, then you can opt to receive the unused claim funds as a cash payment.
Benefits of R&D Tax Credits
The most obvious benefit of being able to make an R&D Tax Credit Claim is if you qualify, you are in effect, reclaiming some of the cost of your qualifying project. However, there are plenty more benefits which are often not realised:
You can make a claim every year – yes, that’s right. Every tax year, as long as you meet the criteria and your project qualifies, you can submit a claim.
You receive a cash payment if you make a loss – if, when your accounts are completed, you have made a loss for the year and there is no Corporation Tax due, you can opt to receive the value of your claim as a cash payment into your business bank.
You can reduce your tax liability – if your accounts have resulted in Corporation Tax based on profits made during the corresponding financial year, you can use the value of the approved claim to reduce the amount you pay. And, what’s more, you can also use the funds to settle any outstanding tax debt with HMRC.
You receive contributions towards vital innovations – most businesses are aware of what needs to change within their business and have ideas on how to do this. With R&D Tax Credits, businesses receive a contribution as such towards making these changes.
Grow your business due to the cash incentive to innovate – your business can continue to grow because the overall cost of the original project will be reduced when a claim is satisfied. This results in more cash available to invest in other areas – or indeed future R&D projects.
More freedom to test and research without wasting money – with R&D Tax Credits, you have a bit of a safety net. You can almost test the project first to see whether it will make a difference. For example, imagine you want to launch a new version of an existing product. You could just go straight in and invest in the development of loads of these products and the funds to bring them to market. But, thanks to the help of Tax Credits, you can invest in extensive research, testing and prototyping of the product and be rewarded with a tax relief for doing it. This is therefore stopping you from potentially making a costly mistake.
Basic Eligibility Criteria
Like most forms of Tax Relief and Government incentives, R&D Tax Credits comes with its own set of eligibility criteria.
To be eligible to make a claim, you must first ensure you are:
A limited company based and registered in the UK which is subject to Corporation Tax.
Not in receipt of state aid totalling more than £7.5million.
Not in receipt of grants totalling the full amount of your project.
Involved in projects which seek to resolve either a scientific or technological issue/uncertainty.
That being said, even if all of these criteria are met, you may not have your R&D Tax Credits Claim approved. Your project has to meet a specific set of criteria too.
R&D Project Criteria
Definitions
As we’ve already touched upon, for a project to be considered an R&D project, it must be part of a specific project designed to “make an advance in science or technology” and solve an uncertainty in either of this fields. This means not only does it help your business, but it aims to have a positive impact on your entire industry. This is why all projects you intend to claim for must relate to your own industry/trade or one which you intend to start up based on the results of your project.
For a project to qualify as R&D, it must also have results that haven’t been discovered already by a professional working within the same field. It’s fine if a competitor has done something similar, but if you have developed something which is significantly better and solves scientific or technological uncertainty, then the chances are your project qualifies for R&D.
Note, your project will not qualify if it relates to an advance within Arts, Humanities or Social Sciences – including economics.
Project Types
The government deliberately made the definition of R&D quite broad to allow for true innovation, but despite it being broad, there are generally two circumstances where a project becomes R&D:
Creating a new product, process or service – or attempting to
Making an existing product, process or service better – or attempting to
We note ‘attempting to’ as a project does not need to have a successful outcome to qualify as R&D, as long as there is justification as to how it tried to solve an uncertainty/make an advance.
Project Scopes
One of the most common difficulties we see arising is figuring out where R&D begins and ends. Often, people consider the start of a project to be when the idea is brainstormed and generated, but in fact, it doesn’t become R&D until the process of determining whether it could be successful has commenced. Similarly, the point at which R&D ends is commonly thought to be when the product or service is launched, however, the end point usually occurs just after testing, when the project is determined a failure or a success.
Project Activities
When we look at specific activities, the most commonly occurring in approved R&D Tax Credit claims are:
Prototyping
Testing
Production Trials
Process/Design/System development or evaluation
Planning – specific to the R&D project
Admin and support – specific to the R&D project
R&D project training
Market research, feasibility studies, research
Design analysis, adaption and optimisation
If you think back to the points on where R&D begins and ends, it will help you to decide whether a project activity you are undertaking will qualify.
Qualifying Project Costs
An important thing to note is that even if your project as a whole meets the criteria to be classed as R&D, it doesn’t mean every single cost associated with it can be claimed as R&D Tax Credits.
The table below lays out some of the most common costs you can claim for.
Software
The software you use during your R&D projects can be included in your claim. However, if this software is used normally within the business, you’ll need to make an adjustment and calculate how much of the software cost would cover the R&D specific usage.
Consumables
There are certain consumable items that you are allowed to claim for, such as power, water, hardware and materials etc. However, attributing these correctly to your R&D projects can be quite tough. HMRC has created an advice article detailing the rules surrounding consumables claims. Have a read!
Prototypes
Actual prototypes – not prototypes made for sale or commercial purposes – but prototypes made purposefully to try and resolve your scientific or technological uncertainties can be claimed for. It’s worth noting though that they can never in any circumstances be sold at a later date.
EPWs
Sometimes you may need to a enlist the help of a third-party company which supplies workers to you that can work specifically on your R&D project. If these workers only work specifically on the project, you may be able to claim up to 65% of the costs paid to the provider.
Costs for volunteers of Clinical Trials
Those in the pharmaceutical sector are usually required to conduct clinical trials as part of their R&D efforts. Obtaining volunteers for these trials can be costly, especially when it comes to first attracting the volunteers and then compensating them for their involvement.
Subcontractors
If you’re applying under the SME scheme, you can usually claim for 100% of the payments made to subcontractors. However, HMRC determines that to get 100% the subcontractors must be a connected party, otherwise, you can only claim 65%.
Staff costs
If you have employees who are directly involved with the R&D project, then you may be able to claim some of their costs. This includes their salaries, pension fund contributions, NI etc.
Research contributions
If you’re a large company which uses a third party to conduct research on your behalf which is directly related to R&D, then you may be able to claim for the cost of it. There are certain criteria that the third-party researchers must meet, so it’s worth checking the guidance beforehand.
NEW FOR 2023 – From April 2023, the government has announced it will be allowing for claims to include the cost of Pure Mathematics and Cloud computing and data. Further information can be found here.
Making a Claim
Choosing the Right Incentive
Before you begin to make a claim, you’ll need to establish the incentive that is right for your business. There are currently two incentives:
SME Tax Credit Incentive: An incentive for SMEs with less than 500 employees, a turnover of less than £100million or £86million in gross assets.
Research and Development Expenditure Credit: For those who do not meet the criteria for the SME Tax Credit incentive. Or those who do but they have other excluding factors such as grants and subcontracting.
In most cases, claims are made through the SME Tax Credit Incentive, so it’s likely that’s where you’ll fall if you’re making a claim. However, it’s worth consulting a specialist who can confirm before you proceed with making a claim to ensure unnecessary rejection is prevented.
Forms to Make a Claim
Claims for R&D Tax Credits are made on an annual basis via your Company Tax Return, but an additional file called the single iXBRIL computations file also needs to be completed. If you are claiming a payable amount instead of a tax deduction, you will also need to complete the supplementary form CT600L.
If your accounting period begins on or after 1 April 2023, you may need to also submit a notification to HMRC in advance of making a claim that you will be submitting one. You can check if this applies to you here.
From 1 August 2023, new rules come into effect stating that for every claim, additional information must be provided about the claim before a Corporation Tax Return is submitted. There’s a lot of information which needs to be provided, including details of each project and what makes them qualify as R&D. As an overview, you’ll need to:
Explain how your project looked for an advance in your field.
Explain how your project had to overcome the uncertainty.
Explain how your project tried to overcome uncertainty.
Explain how your project couldn’t have been easily done by another professional in the same field.
From 1 April 2023, the amount that businesses in the UK can claim as R&D Tax Credits has changed due to a decrease in the rates used in calculations.
Previously, under the SME scheme, there was a 130% deduction rate on costs for profit making SMEs against their tax liability, and loss-making SMEs could claim tax credits to the value of 14.5% of their R&D losses. Now, the deduction rate has dropped to 86% and the loss rate to 10%.
Those claiming via the RDEC scheme could previously claim 11p tax credits on every eligible pound they spent on R&D due to the rate being 13%, but now they will be able to claim more due to the rate increasing to 20%.
Expenditure
There are two types of expenditure you’ll need to calculate when making a claim. The first is qualifying expenditure, which is the amount which you are eligible to claim for based on the criteria and rules around what can be claimed. The second is enhanced expenditure, which is the enhanced amount of relief that you will be entitled to, based on how much you spent on R&D.
To calculate enhanced expenditure, you’ll need to:
Work out the costs directly associated with the R&D project you’re claiming for
Reduce any costs that were for subcontractors or external worker providers by 65%
Add the costs together and multiply by 85%
Add the 86% figure to the original amount of qualifying costs.
The final figure will be the value of your claim.
Making a claim is a complex process and one which must be correct at every stage. Any errors or attempts of fraud will result in an investigation by HMRC. That’s why we recommend always using a professional who has experiencing in the entire process of making an R&D Tax Credits Claim.
If you’d like assistance from our specialist team, please reach out to hello@shenward.com.
Frequently Asked Questions
How far back can I make an R&D claim for?
The current guidance states that R and D Tax Credits can be claimed up to two years after the end of the relevant accountancy period.
Is there a limit to how much refundable R&D Tax Credits I can claim?
From 1 April 2021, there is a cap on the amount of payable R and D Credit you can receive as an SME, which is £20,000 plus 300% of your total staff related tax liability in the same accounting period.
Can I claim if my project has not finished or has failed?
In short, yes. If you meet the eligibility criteria and your costs fall into the financial year you want to claim for, then a claim can be made. The scheme rewards innovation and the investment companies make for technological advancements therefore the intent matters and not the outcome.
Can a sole trader of charity claim R&D tax credits?
No, only limited companies liable to UK corporation tax can claim through the scheme.
Can I make a claim for an overseas project?
If the company is paying UK corporation tax the location of the qualifying R&D activity does not matter.
Our Top Tax Planning Tips to Help You Reduce Tax Liability Legally and Compliantly
The Spring Budget has left many business owners feeling the pressure of navigating tax changes in 2023. In fact, in the most recent ONS Business Insight Report, Taxation was reported as the 3rd biggest concern for business owners in 2023. With various increases to taxation and reductions to allowance, it really comes as no surprise.
In true supportive Shenward style, we want to help you feel more in control of your taxes in 2023. That’s why we’ve gathered tax planning tips from our expert team to help you reduce your tax liability both legally and compliantly.
We’ll first recap the tax changes occurring in 2023 which were announced in the recent budget and in late 2022 budget, covering both personal and business taxation, and Investment and Expenditure taxation and the associated allowances.
Personal
Reduction of Additional Rate Income Tax Threshold – those earning over £125,140 will be taxed at 45% on anything over that figure, 40% on anything between £50, 271 and £125,140, and 20% on income between £12,570 and £50,271.
Capital Gains Tax – the tax-free allowance reduces in April 2023 from £12,300 to £6,000. In April 2024, this allowance will further reduce to £3,000. The tax rates for property sales will remain at 18% for basic-rate and 28% for higher-rate. The tax rates for other asset sales will remain at 10% for basic-rate and 20% for higher-rate.
Private Pension Tax Thresholds – the amount that you can save in your pension before it becomes subject to tax is increasing from £40,000 to £60,000. It applies to all private pensions only.
Vehicle Excise Duty – The VED rates for cars, vans and motorcycles will increase from 1 April 2023, but not for Heavy Goods Vehicles – the VED rate will remain frozen for 1 year for these vehicles.
Income Tax Repayments – under new legislation from 15 March 2023, applications to assign a due tax repayment to a third party will be rejected because it is now illegal to transfer a tax repayment to someone other than the taxpayer or their spouse/civil partner.
Business
The main rate of Corporation Tax for taxable profits over £250,000, will increase from 19% to 25%.
Companies that have profits between £50,000 and £250,000 will pay corporation tax at rate of between 19% and 25%.
Dividend Allowances are being cut significantly. From 6th April 2023, the amount of dividends you can take tax free is £1,000 per annum. In April 2024, this will be reduced further to £500.
Multinational top-up tax and domestic top-up tax – Large global groups with over £750 million in global revenue and who have an effective tax rate of less than 15% will be subjected to new tax rules for accounting periods beginning on or after December 31st, 2023. Read the full rules here.
Plastic Packaging – the rates of tax on plastic packaging have increased from 1 April 2023, meaning UK manufacturers of plastic packaging, importers of plastic packaging, business customers and consumers who buy plastic packaging or goods in plastic packing will be exposed to higher prices.
Investment and Expenditure Allowances
Capital Allowances – from the 1 April 2023 to 1 April 2026, if a company invests in qualifying plant, machinery or technology, these can be deducted from taxable profits through full expensing. This means a 100% deduction for assets in the general pool and a 50% deduction for assets in the special rate pool.
The Annual Investment Allowance – the qualifying expenditure amount has been capped at £1,000,000 from April 2023, meaning that this is the maximum amount you can deduct from your taxable profits.
Electric Vehicle Charge Points – the first-year allowance has been extended for an additional two years. This means that people or businesses who invest in a charging point for the first time can deduct the cost from their corporation tax or personal tax bill within the next two years.
Research and Development – a complete R and D tax relief reform is now in effect as of 1 April. Changes to the legislation, eligibility and claim process should be reviewed in depth here.
Seed Enterprise Investment Scheme – the amount of investment a company can raise via the SEIS is to increase to £250,000 in 2023 – up from £150,000. What’s more the annual investor limit is to be doubled to £200,000 as to support the new raise amount and encourage investors to invest.
Company Share Option Plan – those who qualify to offer CSOP to employees will be allowed to issue up to £60,000 of CSOP options to their employees which has doubled from £30,000 last year.
Real Estate Investment Trust – changes will be made to enhance the REIT regime and its rules from April 2023. One; the requirement for an REIT to have a minimum of three properties where one commercial property worth $20m or more is present has been removed. Two; the tax deduction rule from property income distributions paid to partners is set to be removed.
Charitable Reliefs – UK charity reliefs will now be restricted to UK-based only charities and CASCs. Those not in the UK who have already been approved for reliefs will have a year transition period. The taxes affected are income tax, Capital Gains Tax, corporation tax, inheritance tax, Stamp Duty, SDLT, Stamp Duty Reserve Tax, Annual Tax on Enveloped Dwellings (ATED) and Diverted Profits Tax.
AETD and SDLT – temporary reliefs from AETD and the SDLT 15% rate will apply to those with dwellings that were made available to people who had been given the permission to stay in the UK via the Homes for Ukraine Sponsorship Scheme. AETD relief will apply to charges on or after April 1, 2022, and SDLT relief will apply from 31 March 2022.
As you can see, there’s a lot changing. And, the Spring Budget 2023 revealed more changes are set to be introduced in the future – though they don’t appear in the Spring Finance Bill, they were revealed in the Budget. That’s why it’s important – whether for yourself or your business – to follow recommended tax planning processes.
What is Tax Planning
Tax planning is quite simply the process of arranging your affairs – making a plan – in order to legally minimise tax liability.
You’ll notice we emphasised the word ‘legally’, and that’s because contrary to popular belief, there are several ways in which individuals can legitimately reduce the amount of tax they are or will be liable to pay.
How to Get Started with Tax Planning
Tax planning requires a deep understanding of what taxes a person or company will be liable to pay, knowledge of the various reliefs and provisions on offer in the UK, and a perfect understanding of compliance and legislation. That’s why, Tax Planning Strategies are almost always developed and managed by Tax professionals or Accountants.
However, that being said, there are certain things you can do yourself with a little guidance – guidance just like you will find below.
Tax Planning – Tips for Individuals
Tax planning as an individual is all about ensuring you are accessing the right reliefs and allowances, as well as managing your income and investments.
Here’s how you can make the most of these this tax year:
Review your private pension contributions – did you know, the amount you can put into a private pension without being taxed has now increased to £60K from £40K per year. If you’re the type of person that likes to plan for the future and save as much as possible for retirement, it will be music to your ears that you can invest an addition £20K of your annual income into your pension without being taxed. A little bonus too – The lifetime allowance has also been abolished, so you can continue to pay into your pension without the worry of being penalised later down the line.
Assess your eligibility for Marriage Allowance – Marriage Allowance is a scheme which allows married couples or civil partners to benefit from increased personal tax thresholds if one partner/spouse is earning less than the annual personal tax threshold. Basically, if one partner/spouse is earning £11,310 or less per year, they can make a claim to transfer the remaining £1260 of the tax-free allowance to their partner or spouse, which is then applied to their salary allowing for an extra £1260 of their annual income to be tax free. There are a number of criteria to meet to be eligible, but the good news is, if it is found you are eligible, you can request the last 4 years be assessed and potentially receive a tax rebate for these previous years.
Make sure you’re being smart with savings – there are now so many allowances to utilise from a savings perspective that it makes sense to be smart with how and where you save. Traditionally, people had just one savings account, but since the introduction of ISAs, Shares and Premium Bonds, there’s more choice than ever as to where to invest in your future. Let’s recap the different allowances:
ISA Allowance – you can save £20,000 per year across multiple or one ISA without being taxed on the income you put in there.
Savings Allowance – you do not need to pay tax on the first £1,000 you receive in interest from your savings (only applies to basic rate taxpayers)
Starting Rate for Savings – complicated, but helpful to those on low incomes. If you are earning less than £17,570 and have a personal allowance of £12,570 then you will be eligible for an increased amount of tax-free interest on savings. The amount of tax-free interest you can receive is £5,000 but this is for those who earn £12, 570. For every £1 you earn over the £12,570, £1 is deducted from the amount of interest you can receive tax free.
Junior ISA- you can put up to £9,000 per year in a Junior ISA for your children without incurring CGT or Income Tax on the interest.
Premium Bond Winnings – if you purchase premium bonds and win, you can receive tax free winnings of between £25 and £1million.
As you can see, it makes sense to be smart with your savings. If you have one big savings pot, it might be worth exploring moving the monies to multiple in order to benefit from the above allowances.
Tax Free Childcare Scheme – is your childcare provider part of the Tax-Free Childcare Scheme? If they are, you could be eligible for up to £500 every three months towards the cost of your childcare for each child (and £1000 if the child has a disability). How this works is you set up an account online for your child and make payments directly to your childcare provider through it. For every £8 you pay in, the government will add £2 for you to use to cover the childcare costs. There are obviously certain criteria you must meet, and certain other benefits you cannot be claiming, but it could be that it’s a better option for you. Head over to https://www.gov.uk/tax-free-childcare to find out more.
Check if you’ve overpaid tax – since the introduction of Making Tax Digital, it’s become a whole lot easier to be in control of your tax code. In the past, access to our own tax affairs was quite limited, and an understanding of our tax code was harder to obtain. It could be that you overpaid tax and didn’t realise. Whilst HMRC is competent in their calculations of tax, tax code errors often occur when they don’t have the correct information about taxpayers and their working arrangements. To assess whether you’ve overpaid tax, fill out the claim form here https://www.gov.uk/claim-tax-refund.
Utilise relevant company perks – whilst most company benefits are taxable, there are a number of perks which businesses offer in replace of receiving a set amount of your salary which aren’t subject to tax.
These are usually the following:
Childcare Vouchers
Cycle to Work Scheme
Annual Travel Passes for Public Transport
Goods your employer sells as long as they are at least the value of what it cost them to make.
It’s always worth speaking with your employer to see if any of these are offered. If you do receive them, the income you are then taxed on is the income you receive after the value of these perks has been deducted.
Check if your employer offers tax free payments for homeworking – if you work from home as part of your contractual agreement with your employer and not as a benefit, you may be entitled to receive a small weekly payment from your employer without paying tax or NI on it. Employers are legally allowed to make payments of up to £6 per week to employees from 5 April 2020, if the employee has incurred reasonable additional costs because they work from home, for example increased gas and electric usage.
Utilise Tax Free Expenses – expense policies are put in place for employees for a reason – so that you can reclaim monies you’ve spent which you wouldn’t have normally spent if you weren’t in a particular work situation. However, most of these are usually either taxable or must be reclaimed in the form of tax relief. But there are some which aren’t. The most common expenses you can claim for without being subjected to tax and can receive directly from your employer are:
Travel costs incurred when required to travel to a location not your usual place of work
Food purchased when required to be away from usual place of work
Expenses incurred as part of business meetings where you are not responsible for people within the meeting such as client’s lunches etc
It’s always worth revisiting your contract and company expense policy to understand what can and cannot be reimbursed.
Switch Your Company Car – do you benefit from a company car? When was the last time you checked the renewal date or terms of upgrade? It’s always worth asking your employer if you’re not sure as those who renew and opt for a car with lower CO2 emissions could benefit from a reduced tax liability. If you’re car isn’t due or is unable to be renewed, why not work out whether it would be more cost effective to purchase your own car and give up your company car. You can still claim an allowance for business mileage – and this just might work out cheaper than the tax applied to fuel in your company car paid for by your employer.
Tax Planning – Tips for Businesses
It’s no secret that tax rates for businesses and business owners are increasing all round this year. But that doesn’t mean to say there’s nothing you can do from a tax planning perspective. We’ve listed below just some of the things you can do to legally reduce your tax liability in 2023.
Reduce your plastic packaging usage to either 0 or less than 10 tonnes per year – There is a special exemption on Plastic Packaging Tax for manufacturers and importers of less than 10 tonnes of plastic packaging per year. What’s more, reducing your overall environmental impact as a business could come with other benefits, such as access to environmental reliefs and schemes specifically for businesses.
Review your income structure – if you’re the Director of an owner managed business, now is the time to assess your profit extraction strategy. With Corporation Tax and Dividends Tax and allowances changing from April 2023, it might be the case that moving to a higher salary through PAYE and cutting your dividends reduces the amount of tax due at the end of the year – both CT and PT. Speak with your accountant who can do both calculations for you, so you can compare.
Check your self-assessment tax return – every self-employed person obtaining an income – however small – must complete a self-assessment tax return each year. Whilst is advised to seek help from an accountant with these, it’s also advised that you have involvement in the preparation. There may be various business expenses that you can reclaim such equipment bought, subscriptions and working from home, which your accountant may not know you’ve incurred (N.B. this usually happens when regular accounting isn’t done via a digital accounting system linked to a bank or when business expenses are paid for via personal accounts.)
Estimate your tax liability ahead of time – there’s never been a better time to plan ahead. If you’re keeping monthly management accounts and creating forecasts, it could be a good idea to work out your tax liability ahead of time. Whilst you can’t make it completely accurate, it will give you a good idea what you can expect to pay if things go as planned. If cashflow allows, you can then allocate certain profits to things which will improve/enhance the business, such as plant and machinery, which can be deducted against taxable profits.
Consider remuneration for key personnel – taxable benefits for key personnel within the business not only provide little extras to your employees, but also reduce the amount of profit in your business which is subject to tax. There are a number of taxable benefits you can explore, with the most common right now being electric company cars.
Consider whether a group structure would work– Do you have multiple divisions within your business that could in fact operate as separate companies within a group? It could be worth switching to a group structure. Why? The change in corporation tax rates means that profits above £50k will be taxed higher than 19%. So, if a group structure is in operation, profits can be transferred to other companies in the same group to reduce the tax rate for each company and therefore the overall amount of tax. It’s worth noting however, that it must make business sense to have a group structure, otherwise it could be classed as tax evasion.
Access tax credits – certain businesses are eligible to apply tax credits if they are making a positive contribution towards the economy. The three main tax credits are R and D Tax Credits, Land Remediation, multiple dwelling SDR, and Film Tax Credits. Each of these, if eligible, allow for monies claimed to be applied to your overall tax liability, thus reducing your bill.
As you can see, there are many steps you can take to reduce your tax bill, whether a business owner or an individual.
The most important thing to remember is that even with Tax Planning, you must remain compliant. Tax Evasion and Tax Avoidance are criminal offences.
If you need any support with creating a Tax Planning Strategy, please reach out to our expert team.
When is it ok to form a limited company for your buy to let business and when is it not?
A recent report by estate agent Hamptons showed that a record number of new limited companies have been set up by landlords in 2021, revealing a 23% increase compared to the previous year.
Why? When a landlord buys a property through a limited company, they are able to benefit from more attractive tax rates, and this has led to a greater increase in this practice over the last year.
But it’s not appropriate in all circumstances and you’ll need to proceed with caution. Here we explore the subject on a deeper level to ensure any decisions you make are well informed.
What is a buy to let limited company?
A buy to let limited company is a company you can use to buy investment properties through a limited company instead of in your own name. Some may refer to this as a Special Purpose Vehicle ‘SPV’.
The same rules apply for a buy to let limited company as a usual limited company, with business owners having to submit regular accounts to Companies House. These include:
Annual accounts
Confirmation statement.
Corporation tax return (CT600)
VAT returns
Employer (PAYE) returns
Buying a property through a limited company is more cost effective in terms of tax for some landlords, as the laws on buy to let taxation have made investing in property more expensive. For example, mortgage interest costs can no longer be reclaimed in full by landlords who own residential properties in their personal name. Additionally, landlords can no longer claim the 10% wear & tear allowance.
How does a buy to let limited company work?
When you invest in property some landlords choose to get a buy to let mortgage, which is usually in their name.
If you choose the alternative route and set up a buy to let limited company, the company owns the properties rather than the individual, and the mortgage is taken out in the company’s name.
The landlord would pay money into the small business set up and this money would be used for a deposit for purchasing the properties. The remaining monies would then be covered by a limited company buy to let mortgage.
In order to get the mortgage, the limited company has to be set up before the mortgage begins but the limited company does not have to be trading for a certain amount of time.
What are the benefits of setting up a limited company for buy-to-let?
Setting up a limited company for a buy to let property has many benefits, for example it allows landlords to continue to offset their mortgage interest against their profits.
A buy to let limited company also means a landlord’s profits are subject to Corporation Tax rather than individual tax, meaning they’re taxed at a rate of 19 percent rather than a greater rate for individuals. Companies can also claim mortgage interest as a business expense, but they still usually have to pay stamp duty on a limited company buy to let.
Within a corporate structure like a limited company, there is an opportunity to pay a tax efficient salary and dividends, through tax benefits. The first £2,000 of dividend income for each recipient is taxable at 0% – this rule isn’t available for those who aren’t set up as a limited company.
These are just a few of the incentives for landlords to choose a limited company structure, and others include:
Tax relief for all interest paid
Keeping personal finances separate
Income that has accumulated in the company can be distributed after retirement
If ownership is to be passed or shared between family members, share capital offers greater flexibility than real property
Limited companies have a separate legal status and are considered as separate legal entities, offering limited liability protection to landlords
When using a limited company, landlords can also consider the option of selling the company instead of the property. Stamp duty on shares is 0.5%, making it a better option for those looking to buy
For landlords planning to pass their business to family members, succession planning is a lot easier with limited companies than an individually owned.
What are the disadvantages of a buy to let limited company?
As with any tax planning, there are some disadvantages to explore. These should be considered by landlords when choosing which is the best option for their personal circumstances:
If a landlord were to transfer an existing property to a buy to let limited company, they would be subject to capital gains tax and stamp duty tax. The stamp duty land tax would be based on the market value of the property being transferred.
Once the limited buy to let company is set up, the company will need to file an Annual Tax on Enveloped Dwellings (ATED) return, though this is only if the value of the property is above £500,000.
Once the landlord has used the tax-free dividend allowance of £2,000, the dividends will then be subject to the landlord’s marginal rate of tax, which could anywhere between 32.5% or 38.1%.
The number of lenders willing to provide a mortgage for a buy to let limited company is lower and the mortgage interest rates tend to be higher. Of course, this is likely to change once the market begins to change and adapt this newer way of acquiring property, but currently this demand does not reflect the behaviour of the lending market.
There are also additional administration costs required to manage a company, which will result in additional compliance costs and overheads.
Whether a landlord chooses a buy to let limited company or not completely depends on their personal circumstances, properties acquired and what they plan to do in the future with the portfolio.
As always, we’re on hand to advise on the best tax planning route taking into consideration your circumstances. Contact us today if you require support.
The impact of the Covid-19 pandemic on people’s lives and livelihoods has meant that for many submitting a Self-Assessment Tax Return hasn’t been at the forefront of their mind.
With a third national lockdown and schools being closed, the annual last-minute rush to submit tax returns by January 31 may not have been the No1 priority this year.
HMRC has recognised that and if you’re one of the estimated three million or so taxpayers who hasn’t submitted their tax return yet, all is not lost.
HMRC realised this week that people were struggling and this year’s deadline for the 2019-20 tax return has been extended by a month until February 28.
That means late filing won’t incur an automatic £100 fine as it would normally do, though it’s not a ‘get-out-of-jail-free’ card and interest will still accrue on tax due from February 1.
The move by HMRC means that people have a little breathing space but if you can file by Sunday, January 31 you should do so.
If you can’t, here’s a few last-minute tips to help ensure your tax return is as complete as possible and that you only pay the tax that is due.
Make sure you declare all your income
Honesty really is the best policy when it comes to tax affairs. Think carefully about every little pot of income, even foreign income that was not remitted to the UK. If you’re a UK taxpayer it needs to go down.
What about interest on savings too? Yes, rates are at an all-time low and interest is likely to be negligible but it still needs to be declared.
Income from property rentals too needs to be added. It’s worth sitting down for a few minutes and listing where your money comes from.
Claim all your allowances
There are lots of small ‘tax breaks’ and allowances that all add up when it comes to minimizing the amount of tax you pay.
Did you get married or enter a civil partnership but haven’t told HMRC? Married Couple’s Allowance could cut your tax bill by between £351 and £907.50 a year, according to gov.uk. This applies if one of you was born before April 6, 1935.
If you were born afterwards you may be able to claim Marriage Allowance which lets you transfer £1,250 of your personal allowance to your husband, wife or civil partner and could reduce their tax bill by up to £250.
Were you instructed to work from home in the early weeks of the pandemic? You could claim tax relief for additional household costs such as heating, metered water and electricity bills.
Everyone has a Personal Tax-Free Allowance, of course, but there are other allowances to consider too.
Dividend Allowance means the first £2,000 you receive in dividends from investments is tax-free.
Maybe you earn money from buying and selling on eBay or offer a freelance service. Lots of us have a little sideline these days. You can make £1,000 tax-free. This is known as a “trading allowance.”
You can also claim an allowance for spousal or child maintenance payments. Subject to certain conditions the allowance could be worth 10% of the maintenance you pay up to a maximum of £326.
If you or your spouse or civil partner are registered blind or have severely-impaired sight your personal tax allowance is increased. This is worth £2,450 for 2019-20.
Money still tight? Consider Time to Pay
HMRC wants to help if you’re struggling to pay. If you can’t afford to pay your latest bill you can set up a payment plan.
You can only do that if:
* You owe £30,000 or less;
* You do not have any other payment plans with HMRC;
* Your tax returns are up to date;
* It’s less than 60 days after the payment deadline.
You can choose how much to pay straightaway and how much you want to pay each month. You will, however, have to pay interest.
A last piece of advice?
Yes! Be kind to yourself and plan ahead. Keep the pressure off in January 2022 by doing your homework and keeping records as you go.
Keep your tax affairs in order through the year and then when the 2020-21 tax year ends in April you can start preparing your tax return early.
Why not do yourself a favour and submit next year’s tax return early and forget the January blues?
From March 2021 HMRC intends to transfer around one million VAT-registered businesses from the VAT Mainframe (VMF) onto their Enterprise Tax Management Platform (ETMP). This is a process known as “bulk migration.”
There’s a lot of jargon there and you just want to know what it means for your business, right?
It’s pretty straightforward. It’s all about HMRC modernising the way it collects taxes.
Those who have already signed up to Making Tax Digital (MTD) are not affected by the latest changes and don’t need to take any action.
However, those businesses with a taxable turnover of more than £85,000 a year who have not signed up to MTD must do so now or could be hit by a penalty charge.
What’s this “bulk migration” all about?
It’s HMRC getting its systems in order. The transfer or “migration” of these remaining businesses will mean HMRC doesn’t have to continue to operate two separate systems. The old VAT mainframe is expensive to run and maintain so it’ll save money and, hopefully, be more efficient for everyone.
What do I need to do?
Just continue to file your VAT returns as you normally would through your Business Tax Account. Things may look a little different after the switch but change is OK. Keeps us on our toes. The basic principles are the same.
MTD for VAT will be extended to include businesses with taxable turnover below £85,000 from April 2022.
Selecting MTD software and signing up to MTD now will save time and effort in the future. It’s well worth getting it sorted now.
Will my Direct Debit be affected?
Good thinking! For Direct Debits to continue after the migration, HMRC will need a valid and current email address for your business.
This is for your protection and allows HMRC to comply with UK banking regulations which ensure they must inform customers of the date the Direct Debit goes out and how much is being taken.
HMRC will ask businesses for an email address via their Business Tax Account. Doing it online saves time. Without a valid email address HMRC may be unable to collect VAT payments.
What if my accounting software isn’t compatible?
That’s only a problem if you’re still using eXtensible Markup Language (XML) and, to be honest, it’s out-dated and you need an upgrade!
XML allows some software products to file VAT returns directly to HMRC – but that won’t be available after migration. There’s only a small number of businesses who still use XML anyway and from April 21 it will no longer be an option.
I have an agent who handles the VAT for me. Won’t they sort it all out?
Yes – but do have a conversation and check everything is organised.
Following the switch over, agents won’t be able to use the agent online service for VAT clients not yet signed up for MTD. Instead they must file clients’ VAT returns through what’s called an Agent Service Account. Best check with your agent to make sure everything is ready to go.
So that’s what you need to know when it comes to VAT migration. It’s not as complicated as it sounds when you strip out the jargon.
It’s all about the continuing drive to make HMRC one of the most digitally advanced tax collectors in the world and that should be a benefit to us all.
If you need further guidance, we’re always happy to help, so feel free to contact us on hello@shenward.com.
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:
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
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:
12% from 1 January 2018 to 31 March 2020, and
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:
Over the last six months, many businesses who use contractors/freelancers, as well as the individuals themselves, have been under increased pressure to review their current off-payroll working agreements due to the introduction of new IR35 laws.
However, Chief Treasury Secretary Steve Barclay announced 16TH March that the IR35 tax reforms would now be pushed back by one year to April 2021, which has raised concern for those who have already implemented changes.
Whilst many state that it is too late, the government has announced that the move is part of a broad package of measures the Treasury has announced to protect the economy from the coronavirus outbreak.
So, what does this mean?
Due to the new rules now being postponed, businesses who were significantly impacted by IR35 can delay considerations required to comply with the new rules. This will provide them with breathing space to deal with COVID-19, which is significantly escalating.
Furthermore, contractors who would have been affected by IR35 laws would have likely seen a significant reduction in take home pay, assuming day rates were the same. However, these workers will now possible be able to continue to work under the existing regime without the undue uncertainty, especially when contractors and their families may be impacted by the virus.
Why is this a positive move?
Due to the current COVID-19 pandemic, many freelancers and contractors have found themselves in a position where workloads have been ended or significantly reduced.
The recent announcements now mean they are able to accept one-off contracts for work both during the pandemic if required, and most certainly after pandemic when businesses are urgently looking to rebuild following sever disruption.
If you would like clarification on any of the points we’ve just mentioned, please feel free to contact us here https://shenward.com/contact-us/.
April 2018/19 Tax Year Changes – What you should be aware of
It is that time of year again when HMRC will implement the changes announced in the Autumn 2017 budget by the Chancellor of the Exchequer. These changes will come into effect starting from the new tax year on 6 April 2018.
What has changed?
Income tax
Personal allowance will increase to £11,850. The £350 increase from the previous tax year will lead to a reduction in tax of £70 for most people.
The threshold from when you start paying income tax at the higher rate of 40% will increase to £46,350 (2017/18 £45,000).
The tax free dividend allowance is set to decrease from £5,000 to £2000 from the new tax year. The change will see a basic rate tax payer paying an additional £225 of income tax on dividends paid by their company in the 2018/19 tax year.
Benefit in kind tax rates are increasing from the new tax year. Main changes are:
CO2 emission range
2017/18 % applied to list price
2018/19 % applied to list price
0 – 50
9%
13%
51 – 75
13%
16%
76 – 94
17%
19%
The diesel supplement applied on top of the above calculated percentage will increase from 3% to 4% with the effect of increasing the taxable benefit on diesel cars.
Car fuel benefit charge multiplier will increase to £23,400 (2017/18 £22,600).
Flat rate van benefit charge will increase to £3,350 (2017/18: £3,230).
Flat rate van fuel benefit charge will increase to £633 (2017/18: £610).
Capital Gains
The capital gains tax annual exempt amount will increase in line with the consumer price index to £11,700 (2017/18: £11,300).
Pensions
The maximum amount you can draw from pensions without a tax charge shall rise to £1.03million in line with inflation.
Inheritance tax
From 6 April 2018 the value of the additional nil rate band will increase by £25,000 to £125,000.
Auto-Enrolment
Minimum employer contribution towards employee’s workplace pension will increase by 1% from the new tax year.
National Living and National Minimum wage
The minimum hourly wage rate your staff are entitled to depends on their age and whether they are an apprentice. The rates will increase from the new tax year. For 18-24 year olds, this will be the largest increase seen in a decade.
Residential finance costs
From 6 April 2017, landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive basic rate reduction from their income tax liability. This restriction is being gradually introduced from 6 April 2017.
Conclusion
Our summary of this year’s budget is intended to give you a snapshot of the upcoming changes. There are a number of critical changes in this year’s budget so it’s critical that you plan for these implications to be mitigated. Speak with our team to find out more about how we can help you.
