Think piece – Releasing cash in a pandemic — what all businesses need to assess right now
Published on the 27th of July 2020
Author: Nigel Holmes, head of R&D Technical Operations at specialist tax consultancy Catax, associate founder member of Cambridge Cleantech
In this think piece, the Catax team explores the tax relief schemes that companies of all sizes are often unaware of but can use to boost their bottom line. If you would like more information about R&D tax credits, Capital Allowances, or Patent Box, you can email tax relief specialist Nigel Holmes at Nigel.Holmes@catax.com.
Get out of jail free: How firms can release cash during a pandemic
In times of economic pain company executives are very quick to look at efficiencies, and even redundancies. But hundreds of thousands of businesses in Britain don’t realise they are entitled to a series of government tax incentives for which the hard work is already done, and it costs nothing to claim.
The UK thinks of itself as a global centre of research and development, and it has the tax breaks to match. However, awareness of the Government’s three main schemes remains low, particularly when it comes to one of the most generous and accessible initiatives — R&D tax credits.
This is typically because smaller businesses suffer from ‘lab coat’ syndrome, which means they assume R&D tax relief is for big businesses and Bunsen burners.That couldn’t be further from the truth.
R&D Tax Credits
Launched in 2000, the government’s R&D tax credit scheme means any company investing time and money in new products or processes that meet HMRC’s definition of R&D can claim either a reduction in their limited company’s corporation tax bill or a cash lump sum.
The scheme was created to incentivise innovation at companies of all sizes in all sectors. Many businesses are doing R&D week in, week out but don’t realise their activities meet the criteria for claiming.
In reality, any company whose work seeks to resolve a ‘scientific or technological uncertainty’ can claim. This can take the form of a new process, product or service, or be an improvement to an existing one.
For those firms only now realising that they qualify, claims can be backdated up to two years from the end of the tax year in which the R&D took place. This means there can be substantial sums to recover. R&D tax credits for SMEs are worth between 24.7% and 33.4% of qualifying expenditure, depending upon the company’s profit or loss position — so it’s a significant benefit. And for larger companies, the rate of corporation tax relief for qualifying expenditure rose from 12% to 13% in this year’s Budget, which on claims worth hundreds of thousands of pounds is also a significant improvement.
Capital Allowances (CAs) are a form of tax relief that relate to physical assets. They allow the tax a business has to pay on profits to be offset against all the expenses associated with a commercial property such as air conditioning, wiring, heating, lighting and security systems.
If you turned a commercial property upside down and let anything not screwed in or bolted down fall out, most of what is left can be used to claim a capital allowance though the rules are complex.
As CAs are a tax relief on profits, there can be no benefit if a company is loss making. However, if a loss-making company is also making an R&D tax relief claim, a CA claim can increase the amount that HMRC will pay on the R&D claim. This can be boosted even further where the property is used in the R&D described above allowing the cost of the entire building to be claimed.
In addition, CAs are becoming more popular because of a change in this year’s budget. In the past, owners of commercial property who let premises to associated tenant companies often used Entrepeneur’s Relief to get a tax benefit. But the Chancellor reduced the lifetime allowance for this scheme from £10m to £1m earlier this year.
That means many commercial property owners will now find they can get more tax benefit by claiming CAs, as long as they charge the tenant company a business rent.
This is, again, a complex area, but specialist tax relief consultants normally only charge contingent fees so there’s no up-front cost to the claimant.
Finally, the Patent Box tax relief, introduced in 2013, rewards income made from patents. Claiming companies get a reduced rate of Corporation Tax but, as the newest of these three tax relief schemes, a huge proportion of firms remain unaware of it.
This form of relief reduces profits derived from a patented product or process to an effective 10% tax rate compared to the normal 19%. For loss-making companies, it is often assumed that a Patent Box claim would not be worthwhile, but that’s not necessarily the case. If a company is loss-making overall, but has made profit from its patented products, then it is still worthwhile, as it increases the tax loss available elsewhere.
One trap to watch out for is when patents are registered in an individual’s name, rather than the name of the company that carried out the development of the product and is exploiting the patent. Such an ownership arrangement means Patent Box is not available. While the sale or licensing of the patent will resolve this, it does lead to additional legal costs and potential income tax implications. Getting good advice at the outset is vital.
Patent Box was phased in over four years so some firms may have initially come to the conclusion that it wasn’t very generous. The full relief has now been in place for some time and it is worth hundreds of thousands of pounds to some companies.
All three forms of tax relief described above can have a huge impact on the cash flow and financial stability of a company. But once the deadline to claim has passed, there is no way to get these entitlements back.
For more information, contact: Nigel.Holmes@catax.com.
For more advice and support during the pandemic, visit our Coronavirus Guidance page.
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