We were delighted to be in parliament for the Chancellor’s Autumn Budget.  As promised in our earlier post, and as has been our custom for the past 35 years, here is our summary of the main announcements.  Any questions, please get in touch at 028 796 31343.

Personal Allowance

The Chancellor announced that for 2018/19 the individual personal allowance will rise from £11,500 to £11,850, and the higher rate threshold will increase from £45,000 to £46,350.  The rates of tax will remain at 20% and 40% for the basic and higher rates, and the additional rate of tax is unchanged at 45%.

Corporation Tax

The rate for 2018/19 will remain unchanged at 19%.  However, the chancellor announced changes to the way companies’ chargeable gains are calculated.

Capital Gains Tax Relief indexation for companies will be frozen from 1^st Jan 2018.  This relief was originally introduced to avoid taxation of gains which were attributable to inflation.

Dividends

The dividend allowance is to be reduced from its current tax-free amount of £5000 p.a. for 2017/18 to £2000 for 2018/19.  This measure will cost basic rate taxpayers £225 and higher rate tax payers £975 p.a.

Value Added Tax

The VAT registration threshold will remain unchanged at £85,000 for the next two years until April 2020 while the government consults on future thresholds.  It has been widely suggested that this should be lowered to bring more businesses into the VAT net.  Apparently, the government suspects that small businesses deliberately keep their turnover under the VAT registration threshold in order to avoid paying one sixth of their takings to the Treasury!

Capital Gains Tax

The annual exempt allowance will rise from £11,300 at present to £11,700 in 2018/19.

Stamp Duty

This was the most eye-catching feature of the Chancellor’s speech.  He has abolished stamp duty for first-time buyers paying up to £300,000 for a residential property.  On a property of £250,000, this will give a saving of £2500.

Excise Duties

In 2018, fuel duty will remain frozen for the eighth year in a row.  After years of encouraging us to buy diesel cars, the Treasury has decided that a road tax increase of up to £500 will be imposed on new diesel cars to crack down on pollution.  This charge will be avoided as soon as manufacturers bring forward the next generation of cleaner diesels.

Increase of 28p on a packet of cigarettes (2% above inflation).

Duties on beer, cider, wine and spirits will be frozen, with increased duties on cheap, high strength alcohol drinks.

Air passenger duty on short-haul flights to be frozen for the sixth year in a row.  Extra duty of £16 will be levied on first class travel tickets and £47 on private jets.  In principle, this may seem counterproductive at a time when the government’s aim is to make Britain more attractive for international business post-Brexit.

Enterprise Investment Scheme

The annual investment amount has been doubled to £2million provided the amount goes to knowledge-intensive companies.  The government will attempt to disallow investments in low-risk capital preservation schemes.

Making Tax Digital

The government has postponed plans to make businesses and landlord keep digital records and report quarterly to HMRC.  They have abandoned their proposals to make small businesses and landlords subject to the MTD regime.

Final Thoughts

Once again, electoral considerations have forced the Chancellor to postpone the long-held aim of balancing the budget.  It now looks unlikely that this will be achieved within the next ten years.

The stamp duty cut may actually be neutral at best as prices of lower cost homes may rise to counter the saving.

If you have any questions about this Budget Announcement or about taxation for your business, please feel free to email jb@johnbarfoot.co.uk, or phone 028 796 31343.

John Barfoot has been writing a Budget summary at each announcement for the past 35+ years.  It will be published here and sent out first to clients and others who ask to be included on the list.  If you would like to be the first to hear important tax announcements and find out how they will affect you and your business, then add your email address below.  We’ll also send you a selection of our most popular posts.

MAKING TAX DIGITAL (MTD)

MTD will oblige taxpayers with income as low as £10k per annum to file returns at least 5 times per year.

It is estimated to affect 1.6 million companies, 2.4 million self-employed and 900 thousand landlords of residential property – TOTAL 4.9m taxpayers.

It will commence in 2018 for businesses with turnover above the VAT registration threshold (currently £85k).  It will commence in 2019 for businesses with turnover 10k to 85k and in 2020 for Limited Companies and Large Partnerships.

HMRC do not envisage any change to the dates when tax will become payable.

WHAT IS THE RATIONALE FOR THE SYSTEM?

HMRC claim that their ultimate intention is to abolish Self Assessment Tax Returns.

Gov.uk website states:

‘Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs – meaning the end of the annual tax return for millions.’

They believe obliging taxpayers to regularly update their digital tax account will assist them in forecasting their tax liabilities.

It is hard to see how moving to a system of at least 5 returns per annum will make compliance easier for any small business.

OBJECTIONS TO MTD

HMRC do not currently have software and systems in place to make this work reliably.

The House of Lords economic affairs committee warned that the roll-out of the programme was “being rushed” and would impose “unnecessary burdens on small businesses”.

All the professional accountancy bodies in their responses to the consultation document stress that the proposals are being introduced too quickly.

It appears to me that the implementation of the scheme is being carried out in the wrong order in that under current proposals small business will have to implement the system first.

Many small businesses have no computerised record keeping systems in place, nor the knowledge to operate such systems. They will be obliged to invest in hardware and software and/or pay professionals to assist them. This will be simply unaffordable for many small businesses.

Most Limited companies already have such systems in place. Therefore applying MTD in the first place to such businesses is a more logical starting point than starting with small businesses.

PRACTICAL SUGGESTIONS TO LESSEN THE IMPACT OF MTD

It would be great to see the policy scrapped – realistically this is unlikely to happen.

MTD should be applied to Ltd Companies before being applied to other businesses.

HMRC should be obliged to have software and systems in place to handle the scheme and the Limited Company trial run should be for 2 years.

If successful, and agreed to be beneficial, then the system could be extended to other businesses over a certain agreed turnover (e.g. above the VAT registration threshold or a more sensible figure e.g. £250k).

It should not be applied to businesses with minimal turnover at any point.

For help with tax planning for your business and/or estate, feel free to call me on 028 796 31343, or email jb @ johnbarfoot.co.uk.

There has been an increase in fraudsters targeting email addresses with promises of tax rebates.

HMRC will never contact you about a rebate by email (or text message), only by official letter.

Never click on any links in suspicious emails, proclaiming to be from HMRC.  DO NOT provide your sign in details or bank details!

If in doubt, give us a call and we can check your account online.

~ Sarah

Food

• A ready meal company made a successful claim on their research into creating a sauce that didn’t develop a skin
• A pet food company made a more nutritious pet food
• Developing more environmentally friendly food packaging
• Creating new food marinades

Engineering

• An engineering firm developed a material to protect workers from harmful gases
• Tuning cars to improve performance
• Engineering precision gears
• New product used by security services
• Developing parts for racing cars and motorbikes

Manufacturing

• Creating a new light bulb
• Mechanising manufacturing processes
• Improving waste disposal processes
• Developing vehicle safety features
• Specialist safety product for children
• Improving an internal process

Construction

• Redesign of a construction product
• Developing energy saving technology
• Developing door safety feature

Software

• Developing own software
• Making changes to ‘off the shelf’ software
• Developing iPad and iPhone applications
• Developing expenditure mapping system
• Creating online booking software

(Software could be within any business, not just software companies!)

To make a claim or talk to someone who can help you decide whether your business is eligible, contact us at jb @ johnbarfoot.co.uk or call 028 796 31343.

We’ll explain the Credits and how the Relief works, then see how the scheme is doing in Northern Ireland before looking in detail at what kinds of projects and which costs will qualify for the Relief.

For more information and to apply for this Relief, get in touch with us at jb@johnbarfoot.co.uk.

R&D Tax Credits

The R&D tax credit scheme is the Government’s way of rewarding innovative businesses that are developing new, or appreciably improving existing, products, processes, systems and materials, and thereby creating jobs and increasing the country’s wealth creation capacity.  Companies that incur costs in developing such products, processes or services can apply for a cash payment or tax deduction.

The Government has expressed its desire to make the UK the most attractive place to start and invest in innovative companies, and as a result the incentives for companies to innovate have continued to improve.  The European Commission recently confirmed the UK’s advantage in this area, highlighting the UK in their 2014 report on R&D tax incentives as one of the case studies of best practice in terms of eligibility of expenditure, organisation and novelty requirements.

Research and development tax credits are not an aggressive tax planning measure, they are credits that the Government is actively encouraging companies to apply for, as innovation in business supports economic prosperity.

How does HMRC R&D Tax Relief work?  Here are the facts…

R&D tax credits are a relief on corporation tax, and are open to limited companies of any size.  They’re known as an enhanced allowance, which means you get relief on more than you’ve actually paid.  In April 2015, the Government further increased the relief available to SMEs to 230% (previously 225%).  This means that for every £10,000 that your business spends on Research and Development, HMRC will allow £23,000 off your taxable profit.  At the current corporation tax rate, this represents an additional tax relief of £2600 on every eligible £10,000 of expenditure.

For a profitable SME an R&D claim would reduce its profits chargeable to corporation tax for the period, by the amount of the additional deduction.  Where this will create a loss for corporation tax purposes, the SME will then have to decide whether to

• carry back the loss to the previous accounting period (assuming there is a taxable profit)
• carry the loss forward and offset against future profits (as and when they arise) at the normal tax rate
• and/or to cash in the loss and accept a payable R&D tax credit from HMRC

There is no stipulation from HMRC as to how this payout must be spent.

Any claim for R&D Relief will be made in your Company Tax Return or amended return.  The normal time limit for making your claim is 2 years after the end of the relevant Corporation Tax accounting period.  Once your claim has gone in, HMRC has 28 days to pay back or make an enquiry.

How much has been claimed?

Interest in this scheme has been steadily increasing since the credits were first introduced in the tax year 2000-1.  Up until 2012-13 (the most recent accounting period for which figures are available) over 28,500 SMEs and 7,000 Large Companies had made a total of 100,000 claims, and received more than £9.5 billion in tax relief and payable credits.  Most of these claims are made by companies with registered offices in London, the East of England and the South East (47% of all claims made and 65% of total amount claimed).  In 2012-13, Northern Ireland-based firms’ claims made up less than 2% of the total amount paid out by HMRC.

R&D in Northern Ireland

Northern Ireland SMEs have been increasing their Research and Development investment, with real-terms spending rising from £207.8 million in 2000-1 to £481.8 million in 2012-13.  See the growth in this graph:

Acknowledging Northern Ireland’s already ‘outstanding’ record in research and development, Arlene Foster, Northern Ireland’s (then) Minister for Enterprise, Trade & Investment, is keen for more local businesses to optimise for R&D.  Ms Foster says:

‘We must continue to build on this and make R&D an integral part of the region’s business culture.  Through the development of new products and processes, or the improvement of existing ones, new lucrative opportunities can be opened up that may not otherwise have been available.’

In the 2015 Budget (March), the Government announced that it would introduce new standalone guidance aimed specifically at smaller companies, backed by a 2 year publicity strategy to raise awareness of R&D tax credits.  This has just been published and includes plans to provide special help for first time claimants, to publish bespoke guidance for small businesses, and by 2017 to begin actively identifying and contacting companies who may be eligible for R&D tax credits but who have not yet made any claim.

It’s expected this will further increase uptake in all regions.  There is no doubt, however, that regions outside London and the South East have the most ground to make up in the coming years.

Why don’t Northern Ireland firms apply for R&D Relief?

While many Northern Ireland-based firms have made successful claims to HMRC (270 claims paying out approx. £10 million in just the most recent financial year), businesses here are repeatedly called out as being massively under-represented in this kind of funding.

Partly this is because NI business owners may not be aware of the scheme.  Or they may share the common misconception that R&D is only available to companies who are involved in formal lab research – pharmaceuticals, robotics and so on – when it is in fact open to any company that is contributing to innovative practices in their respective industry (more on that below).  Finally, business owners are busy running their businesses, and simply don’t have time to look into the process of making a claim.  They’re not sure where to turn for advice, and they don’t fancy getting on the wrong side of HMRC if they make a mistake and their claim is denied.

The result is that most companies in Northern Ireland self-fund their Research and Development
work.  In 2012-13, self-funding accounted for 72% of R&D work in Northern Ireland SMEs (statistics published by DETINI in December 2014).  Government provided less than 15% of R&D funding and overseas grants provided less than 14% (see the pie chart, right).  Even allowing that the definition of R&D for HMRC purposes is narrower than the commercial definition, this still leaves huge potential for Northern Ireland companies to claim for HMRC funding.

Is your business still in the blue zone?

Who can apply for HMRC R&D Tax Relief?

Research and development has a specific definition for the purposes of R&D Relief which is not the same as the commercial meaning.  To qualify for R&D Relief, you need to show that your company’s team of experienced professionals is working on a project that involves tackling a scientific or technological uncertainty.

This can include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes, products and services in a new way.  As such, there is no restriction on the industry in which you work.  Companies as diverse as medical care, manufacturing, engineering, automotive, communications, health and social work and software development have all benefited from this Relief.

That’s companies:

• developing or creating new or improved products/processes
• making advancements in their field of work
• employing technical staff, engineers, software developers or scientists
• that consider themselves to be technically innovative
• that spend any money on development work

How do I know if my company is carrying out R&D?

Research and development is carried out in projects.  Each project will have a specific aim (e.g project to increase nutrient value of pet food) and a clear start and end date.  Your company may be running several such projects concurrently, with staff and other resources overlapping, but each claim will be for just one project.  For HMRC R&D Tax Relief, a project has to satisfy three criteria:

• It’s making an advance
• It’s overcoming technical uncertainties
• It’s not readily deducible

Let’s look at each of these in more detail.

1. Making an advance

The advance can apply to a product, process, service or device.  Your business could be increasing productivity or developing new products or processes.  But the advance does not have to be ground-breaking (e.g. launching the next Google or the latest in renewable energy findings).  You might be aiming to duplicate an existing product/process in an appreciably improved way – this may be making something faster, cheaper, lighter, smaller or higher quality.

The advance can be tangible (e.g. smaller device) or intangible (e.g. cost saving), as long as it is in overall knowledge to your industry (it’s ok if someone else is working on this and hasn’t found a solution, and you may use someone else’s research as a starting point).  A project that merely brings about advancement in the organisation’s own capability would not be sufficient.

The point is that you’re trying to improve something that your industry could benefit from, and spending money in doing so.

2. Overcoming technological uncertainties

The projects cannot be based around known knowledge – there must be technical ‘blind alleys’ involved:  How will X react with Y?  Will X offer the correct physical properties?  Can X and Y be combined to produce Z?  These may be uncertainties of cost, space, regulation, or of complexity of combining two systems, but they can’t be minor or routine.

Consider also your staff – do you employ a technical director/manager?  He is in all likelihood carrying out R&D.  Or maybe you have no knowledge internally but you sub-contract someone for these purposes – the sub-contacting costs are allowable.

3. Not readily deducible

The improvement you’re seeking should be more than minor or routine upgrading, and a solution should not be common knowledge.  Consider whether a competent professional working in your field would recognise the difficulty in the advancement you’re trying to achieve.  Would they be able to readily resolve your problem?  If a solution would not be obvious to a competent professional, then you may have an eligible project.  Pure product development in itself will not qualify, as the point of the project has to be the advance in technology or scientific knowledge.

R&D work for tax relief purposes begins when work to resolve the uncertainty starts, and ends when that uncertainty is resolved or the work to resolve it ceases.  And remember, R&D is work to resolve a scientific or technological uncertainty aimed at achieving an advance in science or technology.  Aimed = you don’t have to actually get there, and aborting a project is fine.  As a general rule, projects should last at least 3 months, as this demonstrates a degree of technical difficulty.

It is particularly important that the people doing the work are involved when considering whether the project is R&D for tax purposes as they are the ones who understand best the scientific or technological problems involved.  They should focus on what advances the project is seeking to achieve and the uncertainties to be faced rather than on the eventual product aspiration, specification or design.

Some examples of successful claims to HMRC

• A ready meal company made a successful claim on their research into creating a sauce that didn’t develop a skin
• A pet food company made a more nutritious pet food
• An engineering firm developed a material to protect workers from harmful gases
• Development of iPad and iPhone applications

More examples here.

Which costs qualify for R&D Relief?

To qualify as R&D, any activity must meet the definitions set out by the Department for Business, Innovation and Skills.  Their guidelines state that the activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity.

If your company and the project both meet the necessary conditions, then you can claim tax relief on revenue expenditure (generally, this means costs incurred in the day-to-day running of the business – not capital expenditure on assets) in the areas outlined below, if all necessary conditions are met.

Your R&D project, especially in smaller businesses, will rarely be neatly packaged with designated staff members, machinery and so on.  You may well have overlapping projects going on in your business at one time.  If you have spent money on something such as staff costs where the employee was only partly engaged on R&D activities, you can still claim for an appropriate proportion of the cost.

HMRC defines four categories of qualifying costs:

• Direct labour i.e. staff on payroll who are working on the project
• External staff, directly employed on the project
• R&D consumables
• R&D subcontracted expenditure

Extra costs such as software licences and utilities are also allowable.

Direct labour – that is, employing staff directly who are actively engaged in carrying out R&D itself.  You can claim for salaries, wages, class 1 NIC and pension fund contributions for staff directly and actively engaged in the R&D project.  The staff must be employed under a contract of employment directly with your company or organisation – not consultants, agency workers, or staff/directors whose contracts of employment are with other companies.  However, these others may qualify under either the rules for staff providers or subcontractors.  Support staff costs, for example administrative or clerical staff, do not qualify, except where they are engaged in the qualifying indirect activities laid out in HMRC guidelines.

External staff – paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D.  The staff provider needs to contract with the individual whose services they supply – not through another person.

Consumables – consumable or transformable materials used directly in carrying out R&D.  These are actual physical materials that are consumed in the R&D, and not things like telecommunication or data costs.  Telephone, rent and rates are excluded as these are not consumed.  Materials used in the construction of products to be sold are also not allowable.

Subcontracted R&D expenditure – if your company or organisation is claiming relief under the SME Scheme, then you may be able to claim back 65 per cent of what you spend on certain R&D activities carried out for you by a subcontractor.  Under the SME Scheme the subcontractor does not need to be a UK resident and there is no requirement for the subcontracted R&D to be performed in the UK.   Large Companies can only claim expenditure on activities that are undertaken directly on its behalf by certain specific kinds of subcontractor.

A company may also claim for payments to clinical trials volunteers – the cost of relevant payments to subjects of clinical trials; utilities – power, water and fuel used directly in carrying out R&D and computer software used directly in the R&D.  Where software is only partly employed in direct R&D, an appropriate apportionment should be made.

Non-qualifying costs include the production and distribution of goods and services, patents, overheads, travel and capital expenditure (other relief is available here).

Capital Expenditure

Although R&D Relief is only available for revenue expenditure (generally, day-to-day running costs), you may be able to claim R&D capital allowances such as plant, machinery and buildings used for R&D activity.

What if I want to apply for another subsidy or grant?

As well as HMRC tax credits, research and development may be funded through self/private investment and grants.  Self-funding is the most common (of course this is how you are inevitably funding your R&D unless you have applied for funding elsewhere!) and private funding is used frequently by business.  There are also grants available from various government enterprise agencies (such as Invest NI) and the EU.

If your company or organisation has received a subsidy or grant for an R&D project, this may affect how much tax relief you can claim.  If the subsidy or grant is a ‘state aid’ recognised by the European Commission, then you can’t claim anything under the HMRC SME Scheme.  For any other type of subsidy or grant, the R&D expenditure you can claim for is reduced by the amount of subsidy or grant received.  However, SMEs may also claim relief under the Large Company scheme if they cannot claim under the SME scheme because of a grant or other subsidy.

How do I claim?

If you’d like a professional opinion on whether your business might qualify for this HMRC Relief or you wish to discuss the possibilities for obtaining your HMRC repayment, get in touch with us.  We will help you to put your claim together, either as a stand alone project or as part of a wider tax planning service.  Our R&D work is carried out on a no win, no fee basis, and our initial discovery period is complimentary.  To get started, phone 028 796 31343 or email jb@johnbarfoot.co.uk.

Click here to read our summary of the Chancellor’s Budget 8th July 2015

The chancellor presented an upbeat message with various interesting and helpful changes to the existing tax regime.

The projected cut in the rate of Corporation Tax to 18% in 2020 was unexpected and welcome, leaving us with a major incentive to attract foreign investment.

For manufacturers and farmers, the Annual Investment Allowance increase from its projected level of £25,000 next January to a new permanent level of £200,000 per annum is both realistic and welcome. For the remainder of the current year the allowance remains at £500,000.

Not so welcome will be the cut in tax relief for properties bought to let. Here the tax relief on mortgage interest is to be gradually cut from its present level of as high as 45% back to 20%. However this is mitigated to some extent in that we have historically low interest rates currently and probably for the foreseeable future. An interesting change to property rentals is the end of the 10% depreciation allowance on furnishings, to be replaced by relief limited to the actual cost of replacement items – generally not nearly so generous. All calculated to take some of the heat out of the London property market no doubt.

The ending of tax relief on the purchase of goodwill where a company buys another business might have been expected as the government took steps recently to curtail tax relief on goodwill. Apparently goodwill is too much of a good thing.

The attractions of incorporating an existing business have been somewhat reduced by the changed tax regime on dividends – formerly an attractive way of withdrawing money from a company due to the lack of NIC on dividends. The government appears to be attempting to tackle the IR35 problem again. This is where people who would otherwise be considered employees set up a limited company and have their income paid into the company to be extracted in a more tax friendly fashion.

I hope you find it interesting and useful.

Please get in touch if I can help further.

Best wishes,

John

Mr Osborne described this second Budget as a ‘stability Budget’, explaining that his aim was to clarify policies announced in the Conservative’s pre-election manifesto and to announce further measures to keep Britain’s economy on the right track.

There has been much debate over the past weeks about how Osborne is likely to include measures perhaps less palatable to many UK tax payers, with reductions on certain tax reliefs and a crackdown on tax avoidance, as well as proposed cuts to public sector spending and welfare.

The Chancellor already intimated that he would like to see three million more people find apprenticeship places, so funding for these schemes has been widely anticipated.

Check back later today for your copy of the Budget Summary 8th July 2015.

I have summarised the Chancellor’s Autumn Statement, as presented in parliament this afternoon:

BUDGET AUTUMN STATEMENT DECEMBER 2014 (pdf).

Please don’t hesitate to contact me if you require this in another format or if you have any questions.

~ John Barfoot

Chancellor’s Budget Summary March 2014 

from John Barfoot FCCA

Photo from gov.uk