Tax

Frost Wiltshire

Research & Development relief: Are you an Innovator?

There is a variety of tax reliefs available to small companies which are advocated by HMRC and can be used to save tax through clear and authorised methods. One such scheme is Research and Development (R&D) tax relief. This is a government incentive designed to encourage innovation by UK businesses. R&D tax relief can be equivalent to up to 33p for every £1 spent on qualifying expenditure.

This can be an extremely attractive taxation relief which is available to many trading companies which participate in activities meeting the definition of research and development. Many business owners have heard of this, but fewer actually realise that costs which have been incurred are eligible for relief.

What counts as R&D?
Whatever its size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you could qualify.

This means you might be:
• Creating new products, processes or services
• Changing or modifying an existing product, process or service

R&D doesn’t have to have been successful to qualify, and you can include work undertaken for a client as well as your own projects.

What costs can I claim for?
An R&D tax credit claim might include staff costs, subcontractor costs, materials and consumables and even some software costs.

Is my business eligible?

There are various tests which are applied in determining whether a company has incurred R&D expenditure. Crucially, R&D activity is distinguished by the test of whether there is presence of an appreciable element of innovation. If the activity breaks new ground it is likely to be included. However, if the activity follows an established pattern it is normally excluded. If expenditure does qualify as R&D, and the company is eligible, the tax relief available is extremely generous. 230% of the total eligible expenditure is deductible for corporation tax purposes. In addition to this, if the company is loss making, the company can claim a tax credit immediately, thus improving cash flow. Here at Frost Wiltshire, we can talk through the company expenditure with you and establish whether we believe the company is eligible for R&D relief. We can then prepare and submit your claim for you, which will include a full report plus calculations.

We offer a range of services alongside R&D tax credit claims, and as such can take on all your business and personal compliance needs alongside this more specialist area if you would like us to. If you are interested, please contact Mel Hackney or Steve Wiltshire on 0117 304 8455 to arrange a free initial consultation.

Frost Wiltshire

Operating through a company – managing the IR35 risk

What Is IR35?

There is a lot of information about IR35 and urban myths of which many aren’t true. IR35 came into effect in April 2000 and was designed to stop contractors working as disguised permanent employees i.e. benefiting from the tax advantages of being a contactor without accepting the increased responsibilities of company ownership. This means working with the same level of responsibility, control and liability expected of directors of other limited companies. For example an IT worker may resign from their permanent role on a Friday, but return on Monday doing the same job, at the same company, same desk with the same manager. The only difference is they are now doing the job as an IT Contractor working through their own limited company.

Due to the increased work, risks and responsibility there are certain tax advantages, for example dividend payments (profits taken from your company) though a limited company do not attract National Insurance contributions, which is fair enough as you wouldn’t be able to benefit from all the standard employee benefits such as holiday pay, sick pay, pension etc.

What is inside and outside IR35?

Essentially if you have the same benefits, responsibilities and control as a permanent employee, then you would more than likely be classed as inside IR35 (caught by IR35). Some of the key factors that determine if you’re inside or outside IR35 are control, financial risk, substitution, provision of equipment (sometimes, especially in secure sites you may have to use a client side equipment), right of dismissal and employee benefits.
Many of the above will be detailed in your contract. However, it is best to remember that although HM Revenue and Customs will more than likely want to see your contract, your working practices must reflect what is in your contract.

IR35 can be a complex issue, but it can be managed.

The underlying message emerging from the HMRC is that there is considerable IR35 under-compliance. HMRC want to tackle the issue with legislative changes and also alterations in approach. It is now more important than ever to understand whether your arrangement is IR35 compliant – there is a lot of money at stake! We can perform comprehensive IR35 Contract Review and look at both your contractual terms and working practices to offer you a clear opinion on your IR35 status.

So, don’t wait until HMRC start taking an interest. Simply call us on 0117 304 8455 to discuss your requirements.

Frost Wiltshire

Changes to tax on savings and dividends

From 6 April 2016, there have been a number of changes in the way that savings income, including interest and dividends, is taxed. As with all tax changes, there will be new opportunities for taxpayers to reduce their tax burden by ensuring that their affairs are structured efficiently. The changes have been billed as a simplification which would lift many taxpayers out of self-assessment. However, whilst the changes will bring simplification for some, they will also mean that others need to complete a tax return, where they did not before. Whether you benefit from these new changes or are penalised by them will depend on your individual circumstances. For example, if a basic rate tax payer receives dividends of more than £5,000 per annum, they will have a tax liability on these dividends for the first time under the new rules and will need to complete a tax return.

So, what’s changed in the taxation of interest?

Since 6 April 2016, every taxpayer has a new ‘personal savings allowance’ (PSA). For a basic rate taxpayer, the first £1,000 of savings income will be taxed at 0% and for a higher rate taxpayer, the first £500 of savings income will be taxed at 0%. No PSA is available for an additional rate taxpayer. The PSA is actually a nil rate of tax rather than an ‘allowance’ in the truest sense. This means that it does not reduce net income for the purpose of determining whether a personal allowance is available or whether the high income child benefit charge applies; it is therefore not quite as generous as it seems. As a result of this, from 6 April 2016, banks and building societies no longer deduct tax from interest, this is now paid gross.

What about dividends?

From 6 April 2016, there were also major changes to the rules on dividend taxation. There were three main changes:

Firstly, the 10% notional tax credit was removed. Secondly, the tax rates on dividends have substantially increased at all levels; to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. The new rates with their comparatives are shown below.

[table id=1 /]

The third change mirrors the PSA above. Each taxpayer will receive a £5,000 Dividend Allowance (DA). Like the PSA mentioned above, this is also a nil rate of tax rather than a true allowance.

Making the most of these changes

In light of these changes, some of the areas that taxpayers should be considering are:
• Spouses/civil partners should ensure that one party is not wasting their PSA or DA. Assets can be transferred between them to maximise their tax free allowances.
• It may not be essential to invest in cash ISAs or stocks and shares ISAs in light of the new allowances, as the first slice of savings or dividends will be tax free.
• For the business owner, it may be worth considering whether it would be more tax efficient to incorporate the business. (This will depend on individual circumstances).
• Shareholders/directors of owner managed companies need to consider the most efficient tax structure for their rewards. For example, ensuring they make use of their DA by taking dividends of at least £5,000 per annum and by charging interest on loans they make to their companies to make use of their PSA.

For a more detailed discussion of how the new rules can affect you and what you might be able to do to improve your tax position, please contact Mel Hackney or Steve Wiltshire on 0117 304 8455.