Your tax obligations and the tax breaks that you may qualify for

Thursday, 19 May 2022

The pandemic has hit many businesses hard over the last two years, and the Chancellor has taken steps to help small and medium enterprises (SMEs) recover and grow. Tax breaks allowing businesses to claim back money on their investments mean you can maximise your cash to help your venture grow.

Tax regulations are a complex area, but it’s essential to comply with them – not only could you face fines for failing to meet your liabilities, you could also miss out on valuable tax breaks if you’re not aware of them. Hiring an accountant is a wise move, as they’ll be able to make sure you get all the financial boosts you’re entitled to, and don’t come unstuck with any oversights. Here are some of the ways the Treasury is giving and taking from your business.

Corporation tax

The main tax that affects SMEs is corporation tax, which is currently payable at a rate of 19% on any taxable profits. That’s due to rise to 25% from 2023, but only for companies with annual profits over £50,000. If your company’s profits are lower than that, its tax rate remains at 19%. There will be a taper above £50,000, so only businesses with profits of £250,000 or greater will be taxed at full 25% rate – that’s about 10% of companies.

Annual investment allowance

This allowance entitles you to claim on the cost of most of what’s known as “plant and machinery” – the apparatus you need to operate your business – up to a designated amount. The cap on claims has been raised from £200,000 of investment to £1m, currently extended until 31 March 2023. The criteria are quite strict, though: company cars, for example, aren’t on the list. You also have to own the assts rather than lease them. Find out more at gov.uk.

Super deductions

The amount firms can offset against their tax bill when they invest in productivity-enhancing plant and machinery assets has been further boosted by the introduction of a “super-deduction”. Until March 2023, companies investing in new plant and machinery assets will be able to claim 130% capital allowance on qualifying investments. There’s also a 50% first-year allowance for qualifying expenditure.

Patent box relief

Companies are allowed to apply a lower 10% rate of corporation tax to those profits earned from patents. The relief operates as a deduction from taxable profits, which means that in certain circumstances, companies with taxable losses can benefit too. Relief is available for every year in which the company owns, and generates income from, qualifying intellectual property. As patents have a life of 20 years, the total relief can be extremely valuable.

Research and development (R&D)

Companies that spend money developing new products, processes or services – or enhancing existing ones – are eligible for a cash payment and/or corporation tax reduction. R&D tax relief allows SMEs to deduct an extra 130% of their qualifying costs from their yearly profit, on top of the normal 100% deduction. SMEs can also claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss. Alternatively, R&D tax credits are available for SMEs, calculated at 13% of a company’s qualifying R&D expenditure.

Employment liabilities and allowances

If you employ people, pas as you earn (PAYE) tax and national insurance need to be deducted from wages and paid to HMRC. But the Employment Allowance can reduce the amount of national insurance contribution liabilities arise. This means no national insurance contributions are payable until your company’s £4,000. You “claim” the allowance each month through your payroll, as your national insurance contribution liabilities arise. This means no national insurance contributions are payable until your company’s £4,000 allowance has been used up. In some cases, a company can eliminate its employer’s NIC bill as a result. However, you can’t claim the allowance if your company only has one employee/director.

If you’re self-employed, you’ll be liable for income tax at a rate of 20% to 45% (or 20% to 46% in Scotland), depending on your profit.

PROFIT FROM YOUR PATENTS

If you have a patented product or process, you can reduce your tax bill, says Simon Bulteel Founder and Managing Director of Cooden – R&D Tax Speacilists

“The Patent Box is a corporation tax relief introduced as an incentive to boost Britain’s flagging innovation spending. It is in effect to follow-on from R&D tax credtis. If, as a result of your R&D efforts, you have a product and/or process you have been able to patent, you might want to consider ‘applying’ for Patent Box.

“It is only available to limited companies that have an existing patent. Following recent changes to conform with global taxation changes, the Patent Box has been updated to reinforce its follow-on nature to R&D Tax Relief, in that the company with the patent is required to have been responsible for the development, with a new R&D fraction element.

“At its core, the intent of the Patent Box is to reduce the tax charge on profits generated from the sale of a patented item or process to 105%. It isn’t a straightforward calculation, but it can reduce your tax bill significantly if the patent is core to your profitability.

“If you think you’ve got a Patent Box claim, Cooden – R&D Tax Specialists is happy to talk with you about it. “We have experience of claims for companies in a variety industries.”

BE REWARDED FOR INVESTING IN INNOVATION

R&D Tax Relief can help you save, says Simon Bulteel, Founder & Managing Director of Cooden – R&D Tax Specialists

“R&D Tax Credit is an incentive for those companies that are performing eligible research and development activity. Eligible costs incurred in performing a company’s R&D create a tax saving for a profitable SMEs, a repayable tax credit for loss-making SMEs and a payable expenditure credit for large companies.

“Companies that make something – manufacturers, engineers, software developers and tech businesses for example – are the most likely to qualify for this form of tax relief. However, our most unusual customer was a debt-recovery business. They were developing software to help them run their business more effectively and meet new regulations.

“R&D Tax Credit claims are on the increase thanks to greater awareness. However, over the past couple of years, there have been a number of new consultancies that know HMRC has been understaffed and have potentially been filing claims that might not survive under anything more than a cursory glance.

“I am an ACCA accountant, and as Director of Cooden – R&D Tax Specialists that means we are held to the highest ethical standards and we’ll be honest in our assessment of your project’s eligibility for the tax relief. Most businesses don’t know that they might be eligible because of the criteria can make it sound like a business won’t qualify, but with £25m in refunds and nine years’ won’t experience of preparing claims, we’ve see a lot.”

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