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 Research and Development (R&D) investment
Tax relief is available on R&D revenue expenditure incurred by companies at varying rates. The current rates of relief are as follows:
y for small and medium-sized companies paying corporation tax at 19%, the effective rate of tax relief is 43.7% (that
is a tax deduction of 230% on the expenditure). For small and medium-sized companies not in profit, the relief can
be converted into a tax credit payment, effectively worth 33.35% of the expenditure although the payment is restricted to £20,000 plus three times the company’s relevant expenditure on workers
y an ‘above the line’ credit exists for large company R&D expenditure. This is known as the R&D Expenditure Credit (RDEC) scheme and allows SMEs to claim a taxable credit of 13% for qualifying expenditure incurred on or after
1 April 2020. Generally, the credit is fully payable, net of tax, to companies with no corporation tax liability
y SMEs barred from claiming SME R&D tax credit by virtue of receiving some other form of state aid (usually a grant) for the same project may be able to claim under the large company RDEC scheme. An SME may also be entitled to the large company RDEC for certain work that has been subcontracted to it.
Involving your family
You can employ family members in your business as long
as it can be justified commercially. Family members can be remunerated with a salary, and possibly also with benefits such as a company car or medical insurance. You can also make payments into a registered pension scheme.
Family members may also be taken into partnership, thereby gaining more flexibility in profit allocation. Taking your non-minor children into partnership and gradually reducing your own involvement as their contribution increases can be a very tax-efficient way of passing on the family business. Of course, you should be aware that this could put your whole family wealth at risk, if the business were to fail.
It is worth noting that HMRC may challenge excessive remuneration packages or profit shares for family members, so seek our advice first. In most cases, if you operate your business through a trading limited company, under current tax law you can pass shares on to other family members and thus gradually transfer the business with no immediate tax liability.
However, a tax saving for the donor usually impacts on the donee, and you need to steer clear of the ‘settlements legislation’, so again, contact us for advice before taking any action.
Unincorporated businesses
Business profits are charged to income tax and Class 2 and Class 4 national insurance contributions (NICs) on the current year basis. This means that the profits ‘taxed’ for each tax year (ending 5 April) are those earned in the accounting period ending in the tax year.
For example, in the case of a trader who draws up his accounts to 31 July each year, his profits for the year ended 31 July 2021 will normally be taxed in 2021/22.
There are special rules for the early and final years of a business, and for partnership joiners and leavers.
Due to COVID-19 many unincorporated businesses have claimed under the Self-Employed Income Support Scheme.
The grant payments are taxable in the tax year in which they are received. Numerous ‘fines’ are being administered for those who fail to comply with the rules and regulations set by government departments. We have already mentioned income tax but other possible ‘traps’ to avoid are:
y late VAT registration and late filing penalties y late payment penalties and interest
y penalties for errors in returns
y penalties for late PAYE returns
y penalties for failing to operate a PAYE or sub-contractors scheme
y penalties for failing to comply with pensions auto-enrolment regulations.
In order to help you to steer clear of these pitfalls, we must receive all of the details for your accounts and Tax Returns in good time, and be kept informed of any changes in your business, financial and personal circumstances.
Employment or self-employment?
There is no statutory definition of ‘employment’ or ‘self-employment’, so determining whether someone is employed or self-employed is not straightforward.
Instead, HMRC applies a series of ‘tests’ in order to ascertain whether someone is classified correctly. As large amounts of both tax and NICs can be at stake, HMRC often takes quite an aggressive line with regard to this issue, and errors can be costly, so seeking advice that is tailored to your situation is essential. Please contact us for assistance in this matter.
Under the ‘IR35’ rules, companies and partnerships providing the personal services of the ‘owners’ of the business must consider each and every contract they enter into for the provision of personal services. The test is whether or not the contract is one which, had it been between the owner or partner and the customer, would have required the customer to treat the owner or partner as an employee and therefore be subject to PAYE.
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