Research and Development (R & D) tax credits are a government incentive, which aim to encourage innovation across a variety of businesses. Depending on the number of working hours a company devotes to research and development, they can potentially lower their corporation tax payment or obtain a refund from HMRC.
Companies based in the United Kingdom are able to claim tax relief for their inventions if they dedicate time to developing new products/services, enhance existing ones, or expand their field’s general expertise.
R&D tax credits are available to companies in all types of industries. However, only certain companies that are subject to corporate tax are eligible to claim R&D tax credits.
It is paramount that limited companies who are making a claim, are engaged in activities that are believed to entail research and development, and that are aimed at improving science and technology.
For an experienced individual within a business, the R&D projects that are being claimed for must contain a certain degree of unpredictability. This essentially means that if the project produces questions that have individuals within the business unsure on answers, then it is a strong suggestion that the company is carrying out effective research and development activities.
If you feel your company are eligible for R&D tax credits, then consider the following questions:
Does your company create and develop new products?
Does your company create and test prototypes?
Does your company want to develop its processes?
Does anyone on your team have a scientific or technical background?
Quest Chartered Management Accountants (QCMA) describe below the impact on businesses through the government introduction of Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA):
If you have no idea what Making Tax Digital for Income Tax Self-Assessment is, here is the government’s view:
“Digitalisation is a key process for business to undergo. The government are supporting this through Making Tax Digital (MTD); a digital service which is a crucial step in providing a more suitable modern digital service that will serve fit for the 21st century. The aim is to boost business productivity and efficiency by better assisting taxpayers and making the tax system more effective and resilient. MTD for income tax requires electronic records of their accounting and quarterly returns to HMRC from individuals subject to income tax on the profits of their profession, trade or property business.
The government have announced this month a delay to the introduction of MTD for ITSA, which was initially meant to be introduced in April 2023 but will now launch a year later in April 2024 for businesses and landlords with an annual business income of over £10,000 within the tax year beginning April 2024. General partnerships are going to be required to sign up to MTD for ITSA in April 2025. This change has come about due to the obvious current challenges businesses face, having to recover from the COVID-19 pandemic over the last year. HMRC now have more time to produce an efficient and robust service, with more time allowed for testing, and provides more preparation time for businesses that are required to join.
With the previous introduction of MTD for VAT-registered businesses, users of MTD are experiencing reductions in input errors and for many it is simply an extension of the way they previously operate. Many users report having increased confidence in the use of technology and managing their tax affairs, saying that they find it much easier to prepare and submit tax returns. Businesses with income tax obligations would be keen to enrol in MTD for ITSA and the digital approach can work for businesses of every size, with over 25% of companies below the VAT threshold having voluntarily chosen to join.”
However, I must question why on earth are the government introducing this? There are many obvious downsides to the introduction of MTD for ITSA. Initially, the government had promised free software for businesses to use but have now backtracked on their word, meaning that businesses will now have to either pay for the software or must pay someone else to submit returns for them. Many small companies used to file their own self-assessment, PAYE or VAT for free through the HMRC website but will now incur a cost for this. Having to go digital is an intimidating task for many in society not used to working with technology and would make their life a lot more difficult. There is no choice being given to these people as they are forced to use MTD. Deadlines will become more frequent with corporation and income tax returns joining VAT in having quarterly deadlines, causing a lot more hassle for businesses. Another complaint for users is reduced privacy as HMRC will be able to find certain data without the company’s knowledge.
MTD for ITSA can be argued as being just another way of the government getting its hands on the share of people’s income a lot sooner by making businesses declare income more often, giving businesses more of a burden administratively as well as the self-employed. Companies may actually become less efficient due to the added time they would spend on submitting returns and could negatively impact the government’s ability to budget and cashflow, with any economic shock like the current pandemic being harder to budget for. With payments on account still being around, taxpayers potentially face the headache of real-time payments as well as what they may owe under the current self-assessment schemes.
Just in case you were in any doubt what is important in business then here is some clarification:
If you are think of starting a business and would like to talk to a qualified accountant in Birmingham who actually knows what it’s like to start a run a business then please call me – 07754 51532
Nick Bonnaud ACMA
What is it?
Back in the 2011 Autumn statement, the Chancellor George Osborne announced the introduction of an ‘above the line’ tax credit by April 2013 to encourage R&D activity by larger companies. Above the line tax credit will enable loss making companies to claim a payable credit.
The intention behind the credit is to incentivise the investment decision makers in companies.
Who Does it Apply to?
Companies or organisations can only claim R&D Relief if a project seeks to achieve an advance in overall knowledge or capability in a field of science through scientific or technological uncertainty. This is opposed to simply seeking an advance in ones own state of knowledge or capacity.
Defining Your Project
To determine whether your project falls in to the correct category, there are 4 questions that you should take in to consideration, they are as follows,
1) What is the scientific or technological advance?
This is where you should consider what exact scientific or technological advance is being sought, simply stating the name, process and functionality of the project will not suffice.
2) What were the scientific or technological uncertainties involved in the project?
This exists when knowledge of whether the projected outcomes are scientifically possible or technologically feasible is not readily available or deducible by a competent professional working in the field.
3) How and when were the uncertainties actually overcome?
This section is used to describe the methods adopted to overcome the uncertainties, and what analysis and subsequent investigations were undertaken. This section does not have to contain great detail, just a sufficient amount to show that the process was not straightforward.
4) Why was the knowledge being sought not readily deducible by a competent professional?
It might be publicly known that others have attempted to resolve the aforementioned uncertainties and failed, on the other hand the uncertainties may have been resolved however information doesn’t exist in the public domain that show precisely how.
Which Costs Qualify?
There are several costs that fall under the category of R&D, for example,
– Employee Costs.
– Staff Providers
– Payments to Clinical Trials Volunteers.
When to Claim
Claims for R&D Relief must be made in your Company Tax Return or amended return. The average time for making your claim is two years after the end of the relevant Corporation Tax accounting period.
A yacht broker based in Dorset has been jailed for failing to pay VAT on the sale of 6 luxury yachts worth £210,000. HRMC VAT officers became suspicious when it was found that the broker had received around £32,500 in VAT reclaims and charged and collected VAT from UK customers without declaring output tax to HMRC.
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief aims to reduce the amount of Capital Gains Tax on a disposal of qualifying business assets on or after 6th April 2008. This is provided that you have met the qualifying conditions throughout a one year qualifying period either up to the date of disposal or the date the businesses ceased trading.
The qualifying conditions for each individual are subject to a lifetime limit, they are as follows,
– For disposals on or after 6th April 2008 – 5th April 2010 = £1 million.
– For disposals on or after 6th April 2010 – 22nd June 2010 = 2 million.
– For disposals on or after 23rd June 2010 – 5th April 2011 = £5 million.
– For disposals on or after 6th April 2011 = £10 million.
Entrepreneurs’ Relief is available to individuals and some trustees of settlements. It is not however available to companies or personal representatives of deceased persons or in relation to a trust where the entire trust is a discretionary settlement.
What Can Relief be Claimed On?
Relief can be claimed on a disposal of assets which fall under the following categories,
– Assets used in the business comprised in a disposal of the whole or part of your business. Qualifying business assets in this category include goodwill and business premises, not included are shares, securities and any other assets held as investments.
– Assets that were used in your business or a partnership of which you were a member, providing they were disposed of within the period of three years after the business ceased trading. This category again excludes shares, securities and any other assets held as investments.
– One or more assets consisting of shares in or securities of your personal company. These shares however must be disposed of either while the company is a trading company, or where you hold shares in a holding company of a group, the group of companies is a trading group, or within three years from the date the company ceased trading or being a member of a trading group.
– Assets owned by you personally but used in a business carried on by either a partnership of which you are a member, or by your personal trading company. The disposal will only be able to qualify provided it is associated with a disposal of either your interest in the partnership, or of shares or securities in the company.
The creative sector in the UK is set to receive a welcome boost, earlier this year Chancellor George Osborne announced Corporation Tax Relief will come in to effect from April 2013. Whilst the tax relief is only being valued at what outsiders deem a relatively small amount (£50 million), it comes as a major boost to the creative sector.
The plan is to make the UK a more attractive location for the production of high budget video games, animation and television shows. It is hoped that the tax relief will stem a recent exodus of drama production from the UK, small screen productions such as ‘The Tudors’ and ‘Robin Hood’ have recently been shot abroad because it is cheaper to do so. The UK film industry has enjoyed the benefits of this relief since 2007, which provided £200 million in support in the past year alone.
Research carried out by the TV Coalition predicts that this relief could provide around £350 million per year as a result of high-budget TV productions moving to the UK. Not only this but the job market would also receive a welcome boost, with thousands of jobs being created and thousands more being preserved in what is a highly competitive economy.
Every year you are required to renew your Tax Credits claim, this is to ensure that you have been paid and are continued to be paid the correct amounts of money.
Who Needs to Renew?
If you’ve received an Annual Declaration form with an Annual Review notice then you are required to renew your claim.
If you only receive an Annual Review notice then your claim will be automatically renewed.
It is important to note however that you should contact the Tax Credit office straightaway if,
– You have had any change in circumstances
– Your income is different to what’s shown in the Annual Review notice
– There are details missing or mistakes on the notice.
How to Renew?
If you are required to renew, you will receive the appropriate forms in the post.
To do so, you can renew your claim in either one of two ways, you can either fill in the form and post it in the envelope provided, or if you prefer you can call the Tax Credit Helpline.
There is no option to renew your claim online.
What Happens if You Don’t Renew?
If you fail to renew your claim after being required to do so then your payments will stop, last year 400,000 people had their payments stopped due to their failure to renew.
Should you forget there is some slight leeway, you will have a further 30 days to provide the information required in the renewal pack.
If you fail to provide the information at the second time of asking then you will be required to make a new tax credits claim.
Tax Credits Deadline
The deadline for your Tax Credit renewal is 31st July 2012.
What are Tax Credits?
Tax credits are state benefits that provide extra money to people responsible for either children, disabled workers and other workers on lower incomes.
Tax credits can fall under one of two categories, Child Tax Credits or Working Tax Credits. Whilst they fall under separate categories, depending on your circumstances you may be entitled to both.
Tax credits are tax-free and you are not required to be paying National Insurance or Tax to qualify, Tax Credits are however means tested, and will be tested against your household income and current circumstances.
How much Tax Credit will you get?
The amount you are entitled to is initially based on your current circumstances and your income the previous year.
Anyone applying now for the first time would use their current family circumstance and the income they received in between 6th April 2011 and 5th April 2012.
It is important to note that if your income has fallen since last year, you can ask HMRC to revise your award based on your estimated annual income.
You must however be careful not to overestimate the fall in your income otherwise you may be overpaid tax credits which you’ll have to pay back at the end of the year.
Below are three examples of who may or may not be entitled to receive Tax Credits,
If you have children
If you have children under the age of one and your household income is less than £66,000 per annum then you may be eligible for Tax Credits, if your children are over the age of one then your household income must be less than £58,000 per annum.
If you don’t have children
If you’re single and your income is around £13,000 or less, then you may be entitled to some Tax Credits, if you’re part of a couple and your income is around £18,000 or less and you work at least 30 hour per week then you might also be entitled.
If you are a disabled worker or are over 50
If you’re returning to work after claiming benefits you might still qualify for working tax credits.
Don’t forget to check back tomorrow on Tuesday 24th July for part 2, ‘Renewing your Tax Credits’.