How to reduce your corporation tax bill

How to make financials more meaningful
30th May 2019
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10th September 2019

How to reduce your corporation tax bill

Are you a business owner or Finance Director looking to inject money into the Company? Maybe you have a project coming up which could benefit from some cash and you would not rather take the money out of cash flow.

Cash flow is arguably one of the most important parts of managing any business. So any tax incentives, or potential tax relief opportunities which are available should always be grabbed with both hands.

But then, you often hear stories about how great these incentives and reliefs are, only to find that there are lots of conditions and qualifying factors, which mean you can’t actually benefit from them, or the paperwork is so complicated that you just haven’t got endless time to fill it in to find out that it’s wrong.

Thankfully, Research and Development tax relief isn’t such a gamble. As long as you are genuinely investing in R&D projects, there’s a great opportunity to cut your corporation tax bill, or even get tax credits from HMRC in the form of an actual cheque (money in the bank!). You would benefit from a professional filling in the paperwork though – but the great news is that they usually don’t charge any upfront fees and only take a percentage when you get your money or Tax Relief.

So, what are R&D Tax Relief incentives?

Research & Development Tax Relief is an HMRC incentive on corporation tax, aimed at stimulating innovation and development in UK industries.The Government wants to encourage businesses to invest in new technologies and scientific development, and so they offer generous reliefs and credits for companies that participate in some form of R&D.

With these reliefs, businesses can substantially reduce their corporation tax liability, eliminate it all together, or even receive a cash lump sum back from HMRC. Claiming this tax refund can therefore give your business a really welcome cash injection.

The R&D Tax Relief Scheme has an extremely large scope, and yet many business owners and SMEs are simply not aware of the potential for saving and this is where a professional comes in as they know what to look for to ensure you are claiming for everything you should be.

It’s not a new scheme either, and has in fact been around for over 10 years and even now, many accountants don’t mentioned it or are not comfortable with dealing with it.

Can any business claim R&D Tax Relief?

There are some limitations on which businesses can claim R&D Tax Relief.

The main criteria you need to know about is that to be eligible your business must be liable for corporation tax, so businesses that are run as sole traders, LLPs or partnerships are therefore not eligible for the scheme.

As well as being liable for corporation tax, in order to claim R&D tax relief, companies must also meet these requirements:

• Be a small or medium sized business for the SME scheme, with less than 500 employees and a turnover less than €100 million, or a balance sheet not exceeding €86 million. If the company is part of a larger group, there are complex rules which need to be factored into the SME threshold test. There is a separate scheme for large companies.

• Have actually spent the money already on research projects – you can’t claim proactively.

• Have undertaken work which, according to HMRC, ‘achieves an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.’

Don’t worry, it’s not as complicated as it sounds

Your research should be advancing some kind of development in your field and not be easily deducible by others in your industry. So if you’re making something better, bigger, faster, cheaper or more efficient, then your project would likely qualify as long as it’s not out there already.

Misconceptions about R&D Tax Relief

Many companies mistakenly believe you have to be working in a high tech, scientific or medical industries to claim for R&D tax relief, but this simply isn’t the case.

There are a few other common misconceptions around R&D tax relief too, which many businesses think will prevent them from claiming, such as:

• The company already receives a grant

• They are making taxable losses

• The project is unsuccessful

• They need to own a patent or formal intellectual property

But again these aren’t true!

How much could my business save?

The amount you can claim varies depending on the size of your business, and the rates of relief can sometimes differ each financial year.

Currently, for every £1 your company spends on research and development projects, you can claim tax relief back on £2.30, under the SME scheme. For a small business, this essentially means your costs are enhanced by 130%!

So for example: let’s say you are running a business that has a taxable profit of £30,000, and you have spent £15,000 on R&D.

To calculate the R&D relief you’d be entitled to, you multiply your R&D spend by 130%. So, in this example, the amount of R&D tax relief is; £15,000 x 130% = £19,500.

You would have £19,500 of tax relief which can be subtracted from your taxable profit figure for the year, to reduce the amount of corporation tax you need to pay.

With the R&D relief, the amount of taxable profit that corporation tax is due on is calculated as follows;

£30,000 – £19,500 = £10,500.

With corporation tax at 19%, you would need to pay tax of £2,280 (£10,500 x 19% = £1,995).

Without the R&D relief, you would have to pay £5,700, of corporation tax (£30,000 x 19% = £5,700).

So in this example, the R&D tax relief scheme would make an actual saving of £3,705 in corporation tax, nearly two thirds of your tax bill saved.

Is it possible to get a cash refund through the scheme?

If your company is making taxable losses then instead of relief, you are able to claim R&D tax credits, paid in the form of cash.

Such a cash injection can be extremely welcome for many businesses, especially if they’ve spent a large amount on R&D and need money back in the accounts for cash flow purposes.

What can be claimed for?

As long as the following overheads are directly related to the project, then you’ll qualify for relief on:

  • Employment and subcontractor costs
  • Materials
  • Software and licences
  • Testing and trialling costs
  • Energy and utility bills

How does a business claim R&D tax relief?

In order to make a claim, you need to perform a detailed review of all your activities, to work out all of the expenditure which falls under any R&D projects. You’ll then need to apply to HMRC and fill in the appropriate forms.

You can do this yourself but it might be a big undertaking when you can ask a specialist to look into it who will be able to save you time, maximise your claims and get you the highest amount of relief possible!

If you would like some help with your R&D Tax Claim please contact Stuart Smith at Watersmiths on 07785 556 450 who can point you in the right direction.