Research and Development (R&D) Relief

Your company can claim R&D Relief if they have an R&D project that seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty, not just an advance in its own state of knowledge or capability.

The project must be related to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.

In order to see whether your company could qualify, please check the following guidelines:

Project – it must be a separately identifiable and commercially viable project.

Advance in science or technology – what scientific or technological advance is being sought? This focuses attention on the project’s aim for an advance.

Science - Scientific uncertainty exists when knowledge of whether something is scientifically possible or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.

Technology - Technological uncertainty exists when knowledge of whether something is technologically feasible, is not readily available or deducible by a competent professional working in the field.

Directly contribute – you’ll need to show that the persons leading the R&D project are themselves competent professionals working in the relevant field.

Scientific or technological uncertainty – Explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.

SME Relief

If a company has fewer than 500 employees and either of the following:

  • an annual turnover not exceeding €100 million
  • a balance sheet not exceeding €86 million

It qualifies as an SME for R&D Relief.

This means there are higher rates of relief. From 1 April 2012, the tax relief on allowable R&D costs is 225% – that is, for each £100 of qualifying costs, your company could have the income on which CT is paid reduced by an additional £125 on top of the £100 spent. It also includes a payable credit in some circumstances.

Larger Company Relief

Otherwise the large company’s relief is available on allowable R&D costs at 130% – that is, for each £100 of qualifying costs, your company could have the income on which CT is paid reduced by an additional £30 on top of the £100 spent. If instead there is an allowable trading loss for the period, this can be increased by 30% of the qualifying R&D costs – £30 for each £100 spent.

Seed Enterprise Investment Scheme

In the Finance Act 2012 the government introduced a new tax advantaged venture capital scheme called the Seed Enterprise Investment Scheme (SEIS).

Qualifying investments will attract income tax relief at 50% on the lower of £100,000 and the amount of the qualifying investments made during the tax year for investments made between 6 April 2012 and 6 April 2017.

There are qualifying conditions as follows:

  • The maximum that can be raised under this scheme is £150,000.
  • The investee company must have been incorporated no more than two years before the SEIS shares are issued.
  • The company must have fewer than 25 employees and assets up to £200,000.
  • The company must not have had any investment from a Venture Capital Trust (VCT), or issued any shares in respect of which it has submitted an EIS compliance statement
  • Within 3 years of the date of the relevant share issue, all the monies raised by that issue must be spent for the purposes of a qualifying business activity, carried on either by the issuing company or by a 90% subsidiary. If this condition is not met, investors will lose their tax relief.
  • The payment of dividends to shareholders is not regarded as being for the purposes of a qualifying business activity.
  • There are also provisions for the withdrawal of SEIS relief in certain circumstances, such as where the shares are sold within three years of issue.
  • A qualifying trade is one which is conducted on a commercial basis with a view to the realisation of profit.
  • Most trades qualify, but some do not. A trade does not qualify if it consists wholly, or substantially, of ‘excluded activities’. A separate list of ‘excluded activities’ are available.
  • Shares must be paid up in full, and in cash, when they are issued.
  • Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up.

Investors

  • You have subscribed for shares which have been issued to you and which at the time of issue were fully paid for. You may subscribe via a nominee.
  • You do not have a ‘substantial interest’ in the company, at any time from date of incorporation of the company to the third anniversary of the date of issue of the shares. ‘Substantial interest’ is defined as owning more than 30 per cent of the company’s issued share capital, or of its voting rights, or of the rights to its assets in a winding up. Shareholdings of associates are taken into account in arriving at the 30 per cent figure. ‘Associates’ include business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives. Relatives for this purpose are spouses and civil partners, parents and grandparents, children and grandchildren.
  • Brothers and sisters are not counted as associates for SEIS purposes.
  • It does not permit employees of the company to claim SEIS relief, but there is a specific exception for directors who are not considered employees and do not receive remuneration.

Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

What you need to know about how this scheme works:

  • All shares must be paid up in full, in cash, when they are issued.
  • Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up.
  • Relief can be claimed up to a maximum of £1,000,000 invested in such shares, giving a maximum tax reduction in any one year of £300,000 providing you have sufficient Income Tax liability to cover it.
  • The shares must be held for three years from the date the shares were issued or after trade actually started.
  • If you have received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for the period above, any gain is free from Capital Gains Tax.
  • Loss relief and carry back relief are also available.
  • You do not have a ‘substantial interest’ in the company, at any time from date of incorporation of the company to the third anniversary of the date of issue of the shares. ‘Substantial interest’ is defined as owning more than 30 per cent of the company’s issued share capital, or of its voting rights, or of the rights to its assets in a winding up. Shareholdings of associates are taken into account in arriving at the 30 per cent figure. ‘Associates’ include business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives. Relatives for this purpose are spouses and civil partners, parents and grandparents, children and grandchildren.
  • Brothers and sisters are not counted as associates for EIS purposes.
  • It does not permit employees of the company to claim EIS relief, but there is a specific exception for directors who are not considered employees and do not receive renumeration.
  • The Gross Assets of the company cannot exceed £15 million and must have fewer than 250 full-time employees
  • A qualifying trade is one which is conducted on a commercial basis with a view to the realisation of profit.
  • Most trades qualify, but some do not. A trade does not qualify if it consists wholly, or substantially, of ‘excluded activities’. A separate list of ‘excluded activities’ are available.
  • Companies are not allowed to raise more than £5 million in total in any 12 month period from the venture capital schemes.
  • The money raised by the share issue must also be employed for the purposes of the trade or research and development within two years of the shares being issued.

If you are looking to invest or are looking for investment in your business, get in touch to discuss the options available to you. Call Jean on 01483 222858 or email jeanc@intheblacksolutions.co.uk.

Small Business Accounting: What does pension Auto Enrollment involve?

By late 2017, in just 3 years time, every employer in the country, even if employing just one person, being themselves, will have to have put in place a contributory pension scheme. The largest employing companies have already been through the process of auto enrollment.

This is a serious attempt at bringing the UK’s retirement planning somewhere akin to countries like Australia and US, ensuring less reliance on the State Pension. There are clear rules regarding differing employee categories, salary definitions, increasing contribution rates and what to do if an employee wants to opt out.

The surprising fact is the opt out rate across the country is as low as 10%, even in low paid jobs. Employers must not be seen to coerce an employee to opt out and the financial penalties for not abiding by the rules are punitive.

So when a year before your staging date, the letter from the Pensions Regulator drops through your letter box, it is time to project manage the large workload heading your way with potentially 50-100 man hours needed. Before then, you may want to read up to prepare yourself on the Regulators website http://www.thepensionsregulator.gov.uk/employers . You can also establish your own staging date if you have your PAYE tax reference number handy. Alternatively, contact a financial adviser to find out more and consider your own company budgeting to ensure a 3-4% of salary employer pension contribution is affordable.

This is something businesses cannot ignore regardless of size. There are a range of solutions including doing it yourself by setting up your own scheme, or using professionals to assist you in the set up.

To make sure you do not miss anything, please get in touch on 01483 222858 or email jeanc@intheblacksolutions.co.uk.

Small Business: Essential Business Planning – Part 4 Cash Flow

Business Planning – Cash Flow

Once you’ve reviewed your sales, resources and costs for the business you will have formulated a budget profit and loss for the business, preferably on a month by month basis. You then need to take account of the payment terms of the sales and the purchases.

Payment terms for sales can vary, it is possible to set your own but with large clients it is not always possible for them to vary their terms from supplier to supplier. It is important to remember that they will often have deadlines for submission of invoices and processes that must be adhered to like purchase order numbers. Also, strange as it might seem an invoice cannot be paid until it has been submitted, so make sure your billing is always the first thing you get done. But even after the invoice has been sent you could still be waiting for some time before the cash is received. Always follow up regularly with statements and reminders but be aware of the time lag as it will affect your ability to pay your own suppliers.

On the purchases side you’ll have different payment terms from staff who maybe paid on a weekly or monthly basis, to rent that maybe quarterly in advance to other suppliers who may extend either 30 or 60 days credit. Don’t forget to include regular payments like PAYE or VAT and corporation tax payments 9 months after your year end. Also, include any capital items like equipment that needs to be purchased or any other costs your likely to incur.

So start with your opening bank balance and outstanding debtors received, then sales as they are paid to terms outlined then deduct costs as and when they fall due and each month this will give you a closing bank balance. You’ll be able to forecast at least a year and see the impact of the changes you’d like to make to your business before making the commitment. But it will also give you the opportunity to get the necessary funding it place to make your plans a reality.

 

Small Business: Essential Business Planning – Part 3 Costs

Preparing a budget – Costs

Once you’ve been through the process of reviewing and setting your sales budget for the year, it’s time to turn your attention to the cost side of achieving these targets.

Direct costs

These are any costs that are directly incurred as a result of the sales you make and can be directly attributable to a job of a piece of business.

The place to start is your gross margin from previous years, this will give you a good indication of your cost of sales. Don’t just stick with this figure though! Having reviewed your sales you will have set a plan of perhaps selling more or selling something different, extending your opening hours or increasing your prices, this leads on to looking at the costs of sales in a similar way. Can you negotiate a smaller cost increase with your supplier? Negotiate a discount for purchasing more? Are there cheaper alternative suppliers? Are there better, more efficient ways of working?

Once you’ve reviewed these it maybe possible to increase your gross margin and therefore as well as selling more, getting a lower cost will result in a bigger gross margin and more profit.

Fixed costs/overheads

These are all the costs that are incurred regardless of whether any sales are made. If you’ve employed staff or signed a rent agreement for premises these will still be incurred whether or not you have sold anything.

This is one of the key reasons why it is so important to plan for the year ahead, so that you can be prepared for any changes within your business and plan accordingly.

You can use the spending for the previous year as a basis for the costs for the coming year but remember to use it as an opportunity to look at what has been bought in the past and whether or not it was worthwhile. That way you can avoid making expensive mistakes again. Go through all costs line by line as there will undoubtedly be room for improvement.

When reviewing your fixed costs incorporate your resources plan as this will give you key information about buying new equipment or recruiting more staff. It will also cover the type and salary of new staff.

Small Business: Essential Business Planning – Part 2 Resources

Preparing a Budget – Resources

Now that you have set a budget for sales it’s time to ask yourself what resources are needed to achieve your plan. By reviewing the resources you can incorporate any changes into the cost side of the budget before finalising this.

Key questions for resources

Are the premises big enough? If not you may have to negotiate with your current landlord to terminate an existing contract and look for bigger premises. This will all take time and forward planning will ensure you minimise additional expense.

Are there sufficient staff? Looking for additional staff can be expensive, recruitment agencies often charge as a % of the starting salary. With the benefit of time these costs can also be reduced, some firms offer incentives to existing staff to put forward candidates for job vacancies and in many cases this can prove much cheaper and more reliable than the recruitment agency or general advertising. “Good people know good people!”

As well as the cost of recruitment additional staff are often not as productive in the first few months as they require time and training to be best utilised depending on your industry and business practices this can be up to 3 months before they are fully operational. This is particularly relevant to service industries where staff are often fee earners.

Do they have the right skills? Identify the skills needed in the business going forward is essential for setting training budgets. Discounts are offered for multiple attendees or purchasing multiple courses with the same supplier.

Do you need to invest in more equipment? Or even a replacement strategy for the existing equipment? This will possibly require additional funds or a financing agreement that will incur interest and other charges. With prior notice you can achieve better and cheaper financing by virtue of choice and prior planning. Getting quotes in advance and finding out their lending criteria.

All of these questions and more will need to be factored in when setting the budget for the coming year and these will all have an impact on the costs of the business.

Small Business: Essential Business Planning – Part 1 Sales

The process of business planning at least once a year is not a luxury but a necessity for even the smallest business and one that should not be ignored.

It gives the opportunity for insight into how your business is performing and areas for improvement. Many small business owners rely on annual accounts but this is often too late as the information is retrospective, and in many cases as much as nine months behind, as they’ve been completed to fulfil your statutory requirement.

Not only that but it will identify other key areas necessary for the successful growth of your business. Do you have the right resources? Do you have the right staff/skills? Are your premises large enough? Do you have sufficient working capital?

Preparing a Budget – Sales

The first place to start is with the sales figures, and previous performance helps with preparing a budget.

If you’re confident that there is a certain level of business and you’re previously experienced growth of say 5% per annum that this can form the basis, but where possible drill down into the detail:-

  • Month by month basis
  • Customer breakdown
  • Type of sale

If possible, use data from more than one year as this will often show trends that can be incorporated into your forecast.

It will also give you the opportunity to review the products/services you offer, is it possible to sell more? Can you provide more to a particular customer or type? Can you offer something different? What are your main competitors doing? Can you increase prices? Do you regularly review prices? Is there any seasonality to your business?

By reviewing all of the information and setting targets it helps to formulate the plan to help you achieve the goals you have set.

The key is also to measure your performance as you go; so set the budget, put the plans and actions in place to achieve the growth, then each month measure your performance.

This helps highlight areas where action needs to be taken and you’re identified it each month and therefore you have the opportunity to put it right before getting to the end of the year and being disappointed that you didn’t make better use of the information you have in order to achieve your goals.

Getting Tax Relief for Gift Aid, Pensions and much more…

If you make any donations to a registered charity you can claim tax relief if you pay higher rate tax. You must keep a record of the payments you’ve made and to which charities, this is then recorded on your self-assessment tax return and allows you to claim relief by extending the basic rate band for the payments made. This way more of your income is taxed at the basic rate of 20% before being subject to the higher rate.

When you make contributions to a personal pension plan these are usually treated as net contributions and the pension provider claims tax back from the Government at the basic rate of 20%. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you pay tax at higher rate, you can claim the difference through your tax return.

Expenses

Expenses that you have paid in order to do your job can be reclaimed via your tax return. For example, if you used your own car for a business trip and your employer only reimbursed at a rate of 30p per mile then you can claim the difference between the approved mileage allowance of 45p per mile and the 30p then you received from your employer as a business expense.

This includes items like work related training, if you as the employee have paid for this then this should be included on your tax return as a business expense. You therefore receive tax relief on the cost of anything work related.

Items that were recorded on your P11d, if these were wholly and exclusively for business purposes these should also be included on your tax return as business expenses to enable you to claim the relief for the reimbursement, otherwise these items are treated as taxable.

If you are unsure what you can claim for – we can help you make sure you claim what you are entitled to, please get in touch.

What to include in your Self-Assessment Tax Return

When completing your tax return you need to ensure that you include all forms of income, no matter how small.

Your income to include:

  • Employment income – use your P60 for the income, don’t forget the P11d for business expenses and benefits. Also include any tips or non-taxed income received.
  • Work related expenses – this includes items like work related training, if you as the employee have paid for this then this should be included on your tax return as a business expense. You therefore receive tax relief on the cost of anything work related.
  • Self-employment income
  • Other sources of income such as selling on the internet, car boot and trade magazine sales
  • Bank interest received – you’ll receive a Tax Deduction Certificate dated 5th April each year
  • Dividend income received – look out for your Dividend Distribution Certificate each time the dividend is declared and paid.
  • Property income received – if you rent out property then you’ll need to keep separate records of each property. See notes below.
  • Foreign income – any income received from abroad, i.e. interest, foreign dividends etc.
  • Child Benefit – you may have to pay a tax charge, known as the ‘High Income Child Benefit  Charge’, if you have an individual income over £50,000 and either: you or your partner get Child Benefit, or someone else gets Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep. It doesn’t matter if the child living with you is not your own child.
  • Capital Gains – the capital gains annual exemption is £10,900 for the 2013-14 tax year and £11,000 for the 2014-15 tax year.

Notes on Rental Property

The Rent a Room Scheme lets you earn up to a threshold of £4,250 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else. You can let out a room or an entire floor of a residential property, whether or not you own your home. You can also use this scheme if you run a bed and breakfast or a guest house.

You can’t use the scheme for homes converted into separate flats.

If you earn less than the threshold, then the exemption is automatic and you don’t need to do anything. But if you earn more than the threshold, then you must complete a tax return and you can then opt into the scheme and claim your tax-free allowance. You need to do this on your tax return.

If you are unsure what you should record – we can help you make sure you complete your Self-Assessment Tax Return correctly, please get in touch.