12th March 2019Top tips on tax aspects of your business

Research & Development – tax credits

The R&D scheme is a Government incentive designed to reward companies who carry out Research and Development. This is a widely underused scheme and the Government has committed to raising R&D investment in the UK from the current 1.6% of GDP to 2.4% by 2027.

A common misconception is that the R&D scheme is only available to firms carrying out pure scientific research in a laboratory. In reality, the relief can apply to any companies who develop or improve any products, services or processes.

The R&D scheme provides an enhanced corporation tax deduction in respect of qualifying expenditure. However, the most attractive feature is that loss-making companies are able to surrender the enhanced deduction for a repayable tax credit.

Maximising deductions

Where businesses find themselves in a corporation tax payable position, it can be beneficial to consider how any liability can be reduced. In particular:

• Capital allowances – an ‘annual investment allowance’ (AIA) is available for expenditure incurred on plant or machinery. Qualifying expenditure within this allowance can be written off in a full for tax purposes in the year of purchase instead of being written down at a maximum rate of 18% on a reducing balance basis.

The Government has announced that the AIA will temporarily increase from £200,000 to £1,000,000 for two years from 1 January 2019. Therefore, where significant capital expenditure is being contemplated, the timing should be carefully considered to ensure that tax relief is maximised and accelerated.

• Tax relief is available for finance costs incurred wholly and exclusively for the company’s trade. Deductions can be claimed in respect of both third party and connected party finance such as shareholder loans.

As a result, in certain circumstances it may be beneficial for shareholders to introduce finance to the company by way of loans. Tax advice should be sought as there are a number of anti-avoidance rules regarding connected party finance, and the tax position of the shareholder should also be considered.

• In the case of owner-managed businesses, in particular start-ups, it is often the case that deductible expenses incurred personally by the owners of the business are not correctly recharged and reflected in the accounts of the business. This means that valuable tax deductions are often missed. It is recommended that a review of the financial position of the business is carried out close to the year end to determine where it is appropriate to reflect other costs and make suitable accruals.

Struggling to pay?

Where the business is struggling to pay its taxes (including corporation tax, PAYE and VAT), it is vital that it approaches HMRC as soon as possible to alert them and to aim to negotiate some further time to pay the debts.

HMRC have previously shown that they are sympathetic to businesses which genuinely find themselves in financial difficulty, but have approached them at an early stage with a realistic plan to make repayments that are supported by sensible forecasts and calculations.

It is also worth bearing in mind that it is in HMRC’s interest to support otherwise profitable businesses through tough economic times, and therefore every effort should be made to agree a sensible way forward with them.