Research And Expenditure Credit Explained

Research and development expenditure credit – making the most of your R&D

Weigh Up The Benefits Before Signing Up

Weigh Up The Benefits Before Signing Up

Details of the new research and development expenditure credit (RDEC) have been clarified in Finance Bill 2013. The RDEC will apply in relation to the current accounting period for many businesses, which could mean an increase in both the effective tax rate and profit before tax. This could have a potential impact on your quarterly, interim and full-year results, so you’ll need to start thinking about the possible issues this creates for your business. The accounting isn’t straightforward and it’s important that you talk through the impact both internally and with your Accountants.

The draft legislation reflects the Budget 2013 announcement that the RDEC rate is to be 10%. It’s no longer a tax incentive but becomes more like a grant which is offset against the research and development (R&D) cost in your profit and loss account. The credit will be available for loss-making companies, but we can now see the restrictions on the credit payable. We’re expecting further changes to the legislation.

There are also other issues you need to think about, including:

  • the transfer pricing impact, particularly if you’re a group undertaking contract R&D
  • the impact for budgeting for future R&D and effective tax rates
  • any impact on your company’s bonuses, if they’re determined by profit before tax, and
  • the need for real-time methodologies for compiling claims.

It’s important that you weigh up the benefits and the associated issues before you opt into the RDEC. Also, because of the increased visibility of an above-the-line credit, there’s likely to be much more pressure on your business to compile the claim quickly after the year end. This makes sure that an accurate claim can be included in your accounts but may also result in faster repayment of the credit.

If you need any advice on this or any other matter, please get in touch.

HMRC Launches Site For Those With Undeclared Income

HMRC Launches New Site For Those With Undeclared Income

HMRC has launched a new mini-site aimed at those with undeclared income. “We’re closing in” they say, using new technology and additional staff. They follow it up to say “if you have any income you haven’t told us about, you need to declare it before we catch you”. So the site aims to encourage relevant parties to come forwards voluntarily to declare such income, rather than waiting to be discovered. It’s not quite an ‘amnesty’ but it kind of hints at being a better way to deal with the situation. Links are given such as “How do I put it right” which takes them to the main HMRC website page outlining how to put your tax affairs in order.

Other links on the same mini site take visitors to areas such as ‘Owning up to fraud‘ and ‘Tell us about someone who is not declaring all their income” so the net is clearly closing in*. We took a look at the ‘Owning up to fraud’ page and it makes interesting reading. According to the site it seems that it’s better to own up voluntarily when tax fraud has been committed, and enter into what is known as a ‘CDF contract’ with HRMC. By following the terms of the CDF contract, HMRC will apparently agree “not to criminally investigate and prosecute you over the fraud you tell them about in that CDF contract” so clearly it’s better to volunteer such information rather than it being discovered.

HMRC have  run adverts on billboards, telephone boxes and bus shelters for 2 weeks  aimed at all such people who might have undeclared income.

* According to The Independent, last year HMRC managed to claim back a whopping £21bn from tax avoiders/evaders. This was a significant increase compared to other recent years and signals that the clamp-down on tax cheats is finally bearing significant fruit.

Will there be a rush of visits? Time will tell, in the mean time if you need advice on Tax – get in touch, we are here to help.

HMRC Consultation: A Significant Shake-Up of Partnership Taxation

The more eagle eyed of you may be aware that HM Revenue & Customs’ (HMRC) released a consultation document on partnerships, representing the biggest shake up of partnership taxation for decades.


A very quiet revolution has been going on in the world of partnerships over the last few months, starting with low-key announcements in the Autumn Statement and further announcements in the Budget. Ordinarily, this would largely be of interest to partners in professional service firms and other businesses that traditionally operate in partnership (and I admit to a certain level of personal interest). But these changes are likely to be far wider reaching given the number of businesses that have in recent times incorporated limited liability partnerships (LLPs) for good commercial reasons.

There are two parts to the consultation. The first focuses on the presumption of self-employed status for a member (partner) of an LLP and the National Insurance that arises as a result.

The second focuses on countering the reduction of tax liabilities by firms that have introduced corporate partners to shelter their profits. While this kind of structuring has received mixed levels of interest, a number of businesses have explored it, often in order to preserve cash flow in the increasingly difficult market place.

The changes are expected to generate additional revenues for the Government of around £300m a year, so these changes are clearly significant. So the impact of the consultation may feel like yet more bad news for many firms struggling in a difficult economic climate. There have been well-reported victims of the downturn while others have seen cash flow become increasingly difficult in recent times – especially around tax payment deadlines.

In particular, firms with fixed share equity partners as a normal step in career progression and those that have introduced corporate partners for reasons such as partner ‘lock in’ or long-term incentivisation will need to keep an eye on what the changes mean for them.

While the new rules won’t come into effect until 2014, firms and partners that could be affected need to follow these developments closely over the coming weeks and months so they can prepare well in advance for the changes.

10 Reasons To Use An LLP

As the owner of a small business, when you decide to “go limited” you have two choices – private limited company (LTD) or a limited liability partnership (LLP). When there are only 2 or 3 of you in the business it can be hard to make the choice – and it may not make much difference either way in the early days. The answer may lie in your plans for the future…

We outline here ten reasons why you should use an LLP

1. Flexible business structure.

2. Key individuals can be rewarded and retained by offering share of income profits and capital profits on a disposal without having to resort to establishing share schemes such as the EMI.

3. If the business of an LLP is acquired by a third party purchaser, they can claim tax relief on the amortised amount of the goodwill acquired. Whilst this can be achieved similarly in a company (where the company sells the business as opposed to the shareholders selling the shares) it avoids the double tax charge that arises where the buyer does not want to purchase the shares.

4. Where there is a corporate member, excess profits can be allocated to the member and are taxed at corporate rates.

5. Individual members profit share allocations are not liable to employers NIC. By contrast anyone using a company would suffer employers NIC at 13.8% on salary or bonus payments.

6. Where individuals possess business knowhow, the value of this knowhow can be introduced into the LLP. The individual members can draw surplus cash from the business against their capital account (represented by the knowhow) without an immediate tax charge. In a company, if a director or shareholder borrow from the company there is a tax charge under s455 Corporation Tax Act 2010 where they borrow in excess of the balance of their directors capital account with the company. There is currently no similar tax charge where an individual member borrows from an LLP against their capital account.

7. There are no taxable benefits in kind on individual members so there is no requirement for P11Ds. Any non-business element is added back to taxable profits.

8. Favourable tax savings where cars are provided to individual members.

9. Non-resident partners can avoid all UK taxes providing there is no UK trade carried out.If a UK company was used this would remain subject to UK corporation tax irrespective of the residence of the shareholders.

10. If all profits are extracted from a company there is not usually a massive difference in the actual tax payable on the profits as an LLP versus a limited company, particularly for profits under £200K. The LLP though can provide other tax planning opportunities as above.

Importance of Tax Return accuracy

Here is an example of the importance of accuracy in your tax return.

HMRC has returned the tax return to a man in Evesham after he apparently answered one of the questions incorrectly.

In response to the question: ‘Do you have anyone dependent on you?’ the man wrote: ’2.1 million illegal immigrants, 1.1 million crackheads, 4.4 million unemployable scroungers, 900,000 criminals in over 85 prisons plus 650 idiots in Parliament and the whole of the European Commission’.

HMRC stated the response he gave was unacceptable.

The man’s response to HMRC was : ‘Who did I miss out?’


Budget 2012


Well the Budget has been and gone, quite a boring Budget with absolutely no freebies.  It will take some time to unpick the stealth taxes but at the moment the most interesting points seem to be few and far between but are:


  1. Top rate of tax slashed from 50% to 45% for those earning over £150,000 from 2013
  2. Thresholds under which you do no pay tax extended to £9,205 from 2013
  3. New personalised tax statements to be produced which will be much more readable and will tell you exactly where your taxes are going although this will not come into force for another two years.
  4. There will be a full integration of the tax and NIC systems which will be much more understandable
  5. A vastly simplified tax system will be brought in for small firms turning over less than £77,000

Of course there may be more but we will only find out on detailed reading of the 104 page document.

UK Tax investigations and Enquiries

Being investigated by the Inland Revenue is extremely serious.  A major enquiry can seriously disrupt your business whilst a self assessment personal tax investigation can be prolonged, detailed and intrusive.

If you have deliberately tried to conceal information and are found out you could be fined or even sent to prison.

Most tax investigations begin because the Revenue has reason to believe that some aspect of your tax return or business accounts is wrong.  They may have received a tip off, some figures in the tax return may not tally with other information they have or the return may have been sent in late.

The Revenue also randomly selects a proportion of tax returns every year.  In the first two years of self assessment some 15,000 returns were investigated.  The Revenue will write to you to let you know that your affairs are being investigated although it will not normally give the reason behind its decision to launch an enquiry.

Under the self assessment regime the Revenue must start any enquiry within 12 months of the last filing date of 31 January but there is no requirement for an investigation to conclude with a fixed period of time.  Some enquiries can last more than two years.

Most enquiries are handled by local tax inspectors with specialist training and experience.  They know what to look for and are well versed in the excuses trotted out by wayward taxpayers who have underpaid their tax.

Whatever happens, taxpayers’ affairs will be dealt with confidentially and information will only be disclosed to people that the individual agrees it may be given to such as a tax accountant or other adviser.

If the problem appears to be a simple one of omission, the Revenue can ask taxpayers to answer specific questions or provide documents that might answer the question.  If it is discovered that tax has been underpaid the taxpayer will have to pay what is due plus any penalty or interest accrued.

In serious cases of fraud, the Special Compliance Office can be involved.  This is the Revenue’s elite unit responsible for the most high profile investigations.

In cases where minor amounts of income have been undeclared or where small mistakes have been made on the return, normally the matter can be cleared up with a few phone calls and submission of relevant paper work.

But where serious fraud (more than £50,000) is concerned, the Revenue can start to request information from banks, accountants and other parties if it is the tax inspector’s ‘reasonable opinion’ that this will help the investigation.

Individuals with complex tax affairs with a business to run may well find it easier to hire a specialist tax adviser or accountant to guide them through the process and minimise the disruption to their activities.

Prosecutions and penalties can be severe including jail sentences and stiff fines designed to recoup the unpaid tax and penalties.

How much tax do small business owners pay?


Income tax and National Insurance

Self employed business owners pay income tax and National Insurance on their taxable profits.  For the 2011/2012 tax year most self employed individuals pay income tax as follows:

  • 0% on the first £7,475 (personal allowance)
  • 20% on the next £35,000 (basic rate)
  • 40% above £42,475 (higher rate threshold)

If you earn more than £42,475 you are a higher rate taxpayer; if you earn less you are a basic rate taxpayer.

Income tax paid by the self employed is exactly the same as that paid by other taxpayers, such as salary earners.  However, the National Insurance position is completely different.  For the current tax year, self employed business owners usually pay Class 4 National Insurance as follows:


  • 0% on the first £7,225
  • 9% on the next £35,250
  • 2% above £42,475

Most self employed individuals with annual earnings over the small earnings exception limit of £5,315 must also pay Class 2 National Insurance of £2.50 per week or £130 per year.

Certain types of income are not subject to National Insurance, including interest from bank accounts (including business bank accounts) and rental income.

Business Profits over £100,000

When your taxable income exceeds £100,000 your income tax personal allowance is gradually withdrawn.  For every additional £1 you earn, 50p of your personal allowance is taken away.  So when your income reaches £114,950 your personal allowance will have completely disappeared.  It also means that self employed taxpayers who earn between £100,000 and £114,950 face a marginal tax rate of 62%.

Older Self Employed Taxpayers

Older self employed taxpayers face a broadly similar burden to their younger counterparts but there are a few differences to be aware of:

  • Taxpayers over state retirement age are exempt from both Class 2 and Class 4 National Insurance
  • Taxpayers aged over 65 at the end of the relevant tax year are entitled to a higher personal allowance.  These higher allowances are however withdrawn at the rate of 50p for each £1 of income in excess of £24,000 (2011/2012) Any taxpayer with income in excess of £29,230 does not benefit from these higher allowances at all.
  • Married taxpayers and those in civil partnerships, where one spouse or partner was born before 6 April 1935, may also be entitled to a married couples allowance yielding a tax saving of up to £729.50 for 2011/12.

Employing children in your business

Paying salaries to your children is a good way to reduce your taxable profits but which children can you legally employ?

With some limited exceptions, it is generally illegal to employ children under 13. The position for 13 year olds depends on local by-laws.  Some areas allow them to do limited work, some allow them to do the same work as a 14 year old and some do not allow them to work at all.

Children under school leaving age may do ‘light work’ (ie office work) provided that it does not interfere with their education or affect their health and safety.  Certain types of work (ie factory work) are prohibited and any business employing children under school leaving age must obtain a permit from the local authority.  Subject to this, children still attending school can work up to two hours a day.  On saturdays and weekdays during school holidays this is increased to eight hours (five hours if aged under 15).  Working hours must fall between 7am and 7pm and are subject to an overall limit of 12 hours per week during term time or 35 hours during school holidays (25 hours if aged under 15).  The child must also have at least two weeks of uninterrupted holiday each calendar year.

16 and 17 year olds over compulsory school age can generally work up to 40 hours per week and can do most types of work, although some additional health and safety regulations apply.  In essence you can generally employ any of your children aged 13 or more and pay them a salary which is deductible from your own business income.

How much can you pay?

A salary paid to a child must be justified by the amount of work which they actually do in your business.  If you employed your 15 year old daughter to answer your office phone one hour each evening, you could not justify paying her a salary of £30,000 but a salary of, say, £1,500 should be acceptable.

The National Minimum Wage applies to any employee aged 16 or more, with reduced rates for those aged under 21 or undergoing training.

However, there is no fixed rate of pay which applies to children.  The rate paid must, however, be commercially justified – in other words, no more than you would pay to a non-family member with the same level of experience carrying out unskilled work, the national minimum wage for 16 to 17 year ods (£3.68 per hour) represents a good guide.  Where the child has some experience, or the role requires some skill, a higher rate will often be justified.

Assuming that a rate of £5 per hour can be justified, the maximum salaries which a child could earn would be approximately as follows:

13/14 year olds                              £3,780

15+ but still school age                  £4,380

Over school age but under 18       £10,400

Subject to this, a salary of up to £7,475 could be paid tax free to a child aged under 16 with no other income.  For those aged 16 or more, any salary in excess of £7,075 will give rise to employer’s National Insurance at 13.8% and any salary in excess of £7,225 will also give rise to employee’s National Insurance at 12%.

There are several different ways to save tax by effectively passing some of your business income directly to your children.  It is vital to remember that the income must be the child’s to keep.  Any arrangements requiring the child to pass the income back over to you will mean that the planning is ineffective and the income is taxed on you.