As businesses slowly recover from the economic turmoil caused by the pandemic, it is clear from discussions with our clients at SLJ Accountants that there is still tremendous pressure on cash flow for many businesses. In this latest article we set out some of the tax reliefs that are worth reviewing.
Some may have already benefited from the support measures which have been made available by the Government. However, many are left wondering how they can address immediate cash shortages and the pressure on cash flow resulting from reduced activity with the delayed return to normality following the easing of restrictions. This is before considering the repayment of any support funding they may have secured.
If businesses have not already done so, this may be a good time to review the tax reliefs which are available to small and medium-sized companies (SMEs). Some reliefs may give immediate cash flow benefits whilst others may result in reduced pressure, lower Corporation Tax (CT) bills, going forward.
In what follows we give a brief overview of the tax reliefs companies could be reviewing.
R & D
For those businesses carrying out innovative activity, the R & D reliefs can provide a cash lifeline for SMEs.
If the company has tax losses because its trading activity has become loss-making in the pandemic, and/or the enhanced R & D CT deduction, the losses can be surrendered for a cash payment from HMRC. The payment is 14.5% of the losses surrendered as opposed to 19% relief if those losses are simply carried forward to cover future profits.
Even for profitable businesses the enhanced tax deduction of 130% of the qualifying R & D spend can provide a material reduction in the company’s CT liability.
To make a valid R & D claim, companies must be undertaking work that leads to an ‘advancement in science or technology’. Many businesses may not think that they are carrying on activities that would qualify as R & D, but have they checked? On the flip side, companies should not be swayed by the ‘R & D chuggers’ who would have us believe, for a fee, that all activity is R & D!
A quick review of the rules should give the company’s management a reasonably clear indication of whether any of the company’s activities would qualify as R & D. If so, take care to ensure that all relevant costs are captured, and supportable so that a valid claim can be made.
Any R & D claim is made in a company’s CT computation which is prepared alongside the company’s statutory accounts for the financial period. If a company has a potential repayment claim, it may be worth them considering changing the year-end date, to create a short period of account, to expedite the loss surrender and repayment. There are several points to consider here.
It is always advisable for companies making R & D claims to submit with their CT computation and return a short report explaining the R & D activity and detailing how that activity meets all the conditions for a successful R & D claim.
If a company is considering R & D for the first time remember to consider amending the previous year’s CT return if the R & D activity was ongoing in that year.
For those companies creating and exploiting patents, the Patent Box rules give a reduced 10% rate of CT to be applied to patent profits. Other non-patent profits would be taxed at the full CT rate which is currently 19%. Some complicated calculations need to be performed to determine the profits subject to the reduced rate. However, once a company has been through the first year, created its own Patent Box model and set up systems to record the relevant costs it should not be too difficult. As with R & D, the Patent Box calculations are part of the company’s CT return each year.
There are similar reliefs, to those for R & D, for companies involved in various creative industries – films, high-end TV animation and video, theatre productions, orchestras, and museum and art gallery exhibitions.
There is an enhanced corporation deduction and a loss surrender for payment possibility.
Tax loss carry back
In his March Budget, Mr Sunak announced a temporary extension to the trading tax loss carry back rules for companies. Companies can now carry back such losses for three years instead of just one. This can potentially generate immediate tax repayments for companies that have paid tax in any of the previous three years.
The carry back extension applies to tax losses arising in accounting periods ending between 1 April 2020 and 31 March 2022. There is also a cap of £2 million of losses which can be carried back, which may only affect a small number of SMEs.
A company would normally deal with a loss carry back in its annual CT return. However, it is now possible for companies to make a de-minimis claim outside of the normal cycle. This facility enables companies to get earlier tax repayments.
So those companies with current year losses should take a good look at the extended rules. The following link may help: https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss
Mr Sunak announced a capital allowances ‘super deduction’ in his March Budget which, if claimed, would give companies capital allowances at a rate of 130% of any new expenditure on qualifying plant and machinery.
The detailed conditions need to be reviewed carefully because in some instances it may not be beneficial to claim the super deduction because of how sales of assets, in respect of which the super deduction has been claimed, are dealt with for capital allowance purposes.
The Annual Investment Allowance (AIA) is still set at £1 million for expenditure incurred before 1 January 2022. The AIA might be all that a company needs.
Capital allowances (continued)
Companies with car fleets should also consider a switch to electric vehicles because 100% capital allowances are available, as well as reduced income tax bills for the car drivers!
Remember that with many fixed asset finance agreements it is possible to claim capital allowances on the full capital cost when the agreement is signed, even though the asset will be paid for in instalments overtime. There are several detailed conditions the most important of which is that the title to the asset can or will pass at the end of the contract term.
Capital allowances also form part of a company’s tax losses so can be included as part of a tax loss carry back claim as described above.
The above measures help to reduce a company’s current and future CT bills and can also help to increase tax repayment claims.
SEIS and EIS
Some companies may be in a position where they can or need to raise funds from potential investors with the issue of new shares for cash. The SEIS and EIS reliefs are only relevant for smaller companies, and in the case of SEIS, new companies.
The tax reliefs are primarily for the investors, with income tax relief of 50% of the investment for SEIS investors, and 30% relief for EIS investors. The prospect of tax-free capital gains, available when the shares have been held for at least three years, is also very attractive for investors.
It is possible to apply to HMRC for ‘advance assurance’ (AA) that the company and potential investments meet all the mandatory requirements for relief to be given. Securing AA can be a very important step for the company in the finance raising cycle because it will give the company the certainty that investors will get their tax relief. Thus, a very good selling point for the company.
The dilution of the founder shareholders is likely to be a planned step in the growth of the company but nevertheless needs to be considered as part of any finance raise.
The detailed rules are beyond the scope of this blog so please do contact us if you want more information.
We have been doing a lot of work with clients on both SEIS and EIS just recently. We have seen the benefits which flow for all concerned.
For free briefing notes on SEIS and EIS, please contact me at email@example.com
As a means of perhaps controlling salary cost increases, companies could consider offering share options, or other share incentives, to their management and staff in place of a salary increase.
In the right situation, an approved EMI share option scheme can be a tremendous incentive for those working in the business. If structured correctly, it could also be a very flexible reward tool for the company.
If an ‘approved’ EMI scheme is used and set up correctly there would be no tax issues for the employee shareholders until they exercise their options and sell their shares. The company would set out the rules for exercise which would typically be linked to an onward sale of the company by the founders.
Such a scheme would help the company recruit high calibre staff and retain those ‘rising stars’ within the business.
The dilution for the existing shareholders would have to be a weighed against the increase in value of the shares due to the increased efforts of the option holders.
- Review the cost-effectiveness of benefits in kind for management and staff. Are there any which are no longer suitable and others which may be more appropriate?;
- Remember to claim a CT deduction when share options are exercised by employees;
- Consider pension contributions for appropriate members of the senior team; and
- A post-pandemic party could be laid on for staff without creating a taxable benefit in kind for them!!
As we have indicated, we have in-depth, and current, experience in dealing with all the above topics with our existing and new clients.
The above points are very much an overview only, so please do contact us for specific guidance on any of the above initiatives – often there can be a lot of devil in the detail.