If you are an innovative company there are a range of tax reliefs and incentives available that could significantly enhance your cash flow.
The main incentive is R&D Tax Relief
At this point I’m guessing that a lot of readers may just have shrugged and thought something like “ok, but we don’t do R&D, we make things”. In many ways, the problem is the name – R&D, research and development, so many people see that word “research” and think of people in white coats in laboratories. The reality is so very different, R&D for tax purposes is a lot more than pure, blue-sky research; it’s not confined to scientists working in laboratories. Actually, the definition of “R&D” for these purposes is incredibly wide and lots of activity that might, at first glance, be thought of as just “what we do” will qualify for the relief.
In my career, as well as the more obvious sectors, I have prepared claims for businesses in sectors such as:
• Hedge funds
• Food manufacture
• Professional services
Consider these questions:
• Do you undertake projects to develop, create, change or enhance your products, processes or services?
• Do you have to overcome technological problems in order to succeed in those projects?
• Do you employ technologists to solve those technological problems?
If you answer ’yes’ to any of these questions, then it is most likely that you will be carrying out R&D for tax purposes. No matter how routine you feel this work is for the business, it is worth giving careful consideration as to whether R&D relief could save you money.
So what is this relief actually worth? Well, if you are spending £500,000 on qualifying R&D the relief will reduce your corporation tax bill by £130,000. What if your business is currently making losses and you don’t have a CT bill? The R&D relief can be surrendered for a payable credit. Qualifying expenditure of £500,000 could produce a payable credit of up to £166,750.
A couple of years ago, I was discussing R&D relief with a director of a small manufacturing company. Initially, he was slightly reluctant to meet as he wasn’t at all convinced they were doing any R&D and he didn’t want to waste my time. However, as we talked about the company’s business, it became clear that they did a bit more than just “make things”. For a start, their business was highly specialised, using high tech, computer controlled milling machines. Now, this in itself didn’t mean that what they did was R&D but it was how they used those machines and what they did with them that interested me.
The director told me how their customers would always be looking to improve their own products (for which his company manufactured specialist components) and that would lead them to request greater accuracy, tighter tolerances, shorter turnaround times and stronger product (for the same, or lower, weight, of course). His technical team had to develop processes and techniques that would allow them to deliver the enhanced product, ensuring that it remained cost-effective. This involved developing new operating procedures as well as new manufacturing methods and tooling in some cases.
All of this was great news as I was able to explain to him that this was exactly the sort of activity that might be classified as R&D for the purposes of this relief. Of course, there was a lot more work to be done to identify all of the qualifying activity and get to an agreed claim but he was happy that he’d agreed to meet with me.
Actually, just before the meeting finished, he casually announced that he had a software engineer working full time developing and programming the control systems for their specialist machines. In the end, a good chunk of that individual’s time was also included in the claim.
Other innovation incentives
Having undertaken R&D in the past, your company might now own and be exploiting a qualifying patent. In that case, the relevant profits generated by that patent could be taxed at 10%, half the standard rate of corporation tax.
The UK’s Patent Box regime, introduced in 2013, is a pretty generous relief. Although recent changes – to comply with new international regulations – have increased the complexity of the computations, it is still a very valuable benefit.
Creative Industries Reliefs
A suite of reliefs targeted at specific “creative industries” has been introduced over the last few years. These are:
• Film Tax Relief
• Animation Tax Relief
• High-end TV Tax Relief
• Children’s TV Tax Relief
• Video Games Tax Relief
• Theatre Tax Relief
• Orchestra Tax Relief
These reliefs provide either an additional deduction for certain eligible costs when computing taxable profit (this reducing the tax liability), or a payable credit where appropriate.
For specific advice on any of these incentives, or just to discuss how your business might benefit from them, call or email me.
I’m not a general practice accountant, I have been specialising in these innovation incentives for over 17 years; my business is about helping you to easily access the benefits, working with you to ensure your business gets the best result.
Blog submitted by David O’Keeffe, Aiglon Consulting