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R & D boost for smaller businesses

In a major boost for pioneering small businesses, the Financial Secretary to the Treasury, David Gauke, recently launched a new plan outlining how government will make it easier for small businesses investing in research and development to claim tax relief.

The two-year plan, which is a response to an HMRC consultation, aims to increase take-up of research and development (R&D) tax relief through raising awareness of the relief amongst small businesses and making it easier for them to apply.

The tax relief, which encourages companies to invest in costly new product development, helps companies reduce the amount of corporation tax they pay on profits by offsetting them against any investment in research and development. Latest statistics for 2013-14 show more than 15,000 SMEs claimed the relief in 2013, an increase of around 19 per cent from the previous year, but the government wants to go further.

Financial Secretary to the Treasury David Gauke said:

R&D is crucial for the long-term growth of the UK economy. Over 15,000 SMEs claimed the relief in 2013, an increase of around 19 per cent from the previous year, but we need to go further to support pioneering small businesses.

That’s why we’ve published a document setting out our plans to increase awareness and make it easier for people to apply.

The plan, ‘Making R&D Easier: HMRC’s plan for small business R&D tax relief’, was published 28 October 2015 and sets out that:

  • From November, small companies – with a turnover under £2 million and fewer than 50 employees – will be able to seek advance assurance on R&D tax relief. This will give them greater certainty and enable them to plan their finances effectively.
  • HMRC will explore ways to improve its communication around R&D tax relief, including looking at ways to use data and work with other government agencies to identify companies that have carried out R&D but have not claimed relief.
  • Interactive guidance will be developed with stakeholder involvement

HMRC evaluation shows that each £1 of tax foregone by R&D tax relief stimulates between £1.53 and £2.35 of additional R&D investment. SME R&D relief works by way of super deduction, allowing companies to reduce profits liable to corporation tax by 230 per cent of their qualifying R&D expenditure. In 2013-14, businesses received £1.75 billion in R&D tax relief, an increase of almost £750 million since 2009-10.

Wear & Tear Allowance (WTA)

If a property is let furnished – with sufficient furniture, furnishings and equipment for normal residential use – landlords can only claim tax relief for the furniture and equipment by way of the WTA. Prior to April 2013, landlords had the option of claiming the cost of replacement furniture instead.

 The WTA is calculated as 10% of the gross rents less any tenant’s costs (e.g. water rates and council tax) met by the landlord.

WTA does not cover repairs, which continue to be tax deductible. The question is then raised can replacement of an item be counted as a repair? In this respect, landlords that let furnished property need to distinguish between:

  1. Replacement of items that are integral to the building, and
  2. Replacement of items that are not integral to the building.

 Needless to say there are grey areas!

 Replacement of items that are integral to the building

 Fixtures integral to the building are those that are not normally removed by either tenant or owner if the property is vacated or sold. Examples include:

  • Baths
  • Washbasins
  • Toilets
  • Immersion heaters
  • Fitted kitchens and fitted white goods.

This list is not intended to be complete but gives an idea of the assets that are integral to the building and fall outside the wear and tear allowance. As these items are integral to the building, the cost of replacing these items is normally an allowable expense as a repair to the building.

 Replacement of items that are not integral to the building.

 Expenditure of this type will be covered by the WTA. Examples given on HMRC’s website in this category include:

  • movable furniture or furnishings, such as beds or suites,
  • televisions,
  • fridges and freezers,
  • carpets and floor-coverings,
  • curtains,
  • linen,
  • crockery or cutlery,
  • beds and other furniture

Unfortunately, these examples are not definitive: is a carpet glued to the floor a permanent fixture, or not part of the integral features?

Unemployment drop…

Figures recently published by the Office for National Statistics show that unemployment has dropped below 7% for the first time since the recession and employment has seen the biggest annual jump in a generation.

Unemployment fell by 77,000 in the last 3 months, taking the unemployment rate to 6.9% for the first time since 2009.

In the largest annual rise in nearly 25 years, the number of people of people in a job rose by 691,000 – more than double the population of Newcastle – bringing the record number of people in work to 30.39 million.

Wages also rose on the year by 1.7%, against yesterday’s announcement that March’s inflation had dropped to 1.6%, and job vacancies rose again, up 108,000 over the past year bringing the number of vacancies in the UK economy to 611,000. The 1.7% increase in wages includes bonus payments, without bonuses the rate of increase is 1.4%, still below the rate of inflation.

Minister for Employment Esther McVey said:

More young people are in work, more women are in work, wages are going up, and more and more businesses are hiring – and it’s a credit to them that Britain is working again.

But there is still more to do – which is why I’d go even further and call on more employers to work with us to tap into the talent pool the UK offers.

The number of people in work has increased by 1.5 million since 2010 – over a million of these jobs are full-time – and the employment rate is now 72.6%, showing the government’s long-term economic plan to back enterprise and businesses so they can create jobs is working.

The proportion of women in work also hit a new record of 67.6% – the highest since records began.

Long-term unemployment is down 93,000 on the year, which is the largest annual fall since 1998. The number of unemployed young people also fell, by 38,000 over the last 3 months, and has been falling now for the last 7 months.

Government announces extension for pension decision period

The government announced recently that people who have recently taken a tax-free lump sum from their defined contribution pension will be given 18 months rather than 6 months to decide what they wish to do with the rest of their retirement savings, and will not be put at a disadvantage should they wish to wait to access their pension savings more flexibly.

This follows an earlier announcement confirming that the government would take action to ensure that people do not lose their right to a tax-free lump sum if they would rather use the new flexibility this year or next, instead of buying a lifetime annuity.

Under current tax rules, once a tax free lump sum has been taken, individuals have six months before they are required to make a decision regarding their pension, either by buying an annuity or entering into capped drawdown.

Currently, if this is not done, the lump sum is then taxed at 55%. This extra time will allow people to make the right decision for their pension.

Exchequer Secretary to the Treasury, David Gauke, said:

“At Budget the government announced the most fundamental change in the way that people access their pension in almost a century, ensuring that over 400,000 people who have worked and saved hard will be able to access their retirement savings more flexibly.

However, we recognise that decisions people take regarding their pensions are important and take time. This extension to the decision making period will give people the opportunity to take full advantage of the new flexibilities introduced at the budget.”

Radical proposal to change private residence relief

At present, it is possible to make an election, in certain circumstances, allowing owners of more than one residential property to choose which property is their main residence. In this way a measure of Private Residence Relief (PRR) can be achieved for the elected property. This process of swapping properties for tax purposes achieved notoriety during the MPs’ expenses scandal when certain MPs were found to have “flipped” between properties in London and their constituency to achieve capital gains tax advantages when they sold.

HMRC have recently published a consultation document entitled “Implementing a capital gains tax charge on non-residents”. Surprisingly, section 3 of the document proposes that the present PRR election is to be scrapped for UK home owners and replaced by less advantageous rules. Here’s what the report says:

“The government is considering two possible approaches, both of which involve changes to the process by which a person can benefit from PRR. The government may:

  1. Remove the ability for a person to elect which residence is their main residence for PRR. This would mean that PRR would be limited to that property that is demonstrably the person’s main residence. The government envisages that this would build on the existing process that applies where an individual with two or more residences has not made an election. In these cases, the person’s main residence is determined by the balance of all the evidence including factors such as the address where the taxpayer’s spouse or family lives, mail is sent, and that is on the electoral roll.
  2. Replace the ability to elect with a fixed rule that identifies a person’s main residence e.g. that in which the person has been present the most for any given tax year. Depending on the test that is devised this may mean that taxpayers have to keep different or additional records.”

It is likely that any changes to legislation will be effective from April 2015. This does give owners of more than one property a chance to consider their options in the interim period. Please contact us if you would like an update on the present capital gains tax opportunities. 

Office for Budget Responsibility (OBR) issues conflicted information

It would seem that economic indicators confuse economists as well as the rest of us. The first two paragraphs of the recently published Executive Summary of the OBR makes for interesting reading.

 Here’s a bullet point summary:

  • The UK economy has continued to recover.
  • In the final quarter of 2013, GDP growth matched our December forecast, inflation fell back to target and unemployment dropped more quickly than expected.
  • But productivity and wage growth remained disappointing.
  • Revised data published since our last forecast suggest the economy grew slightly faster over 2013 as a whole than we expected in December, with GDP up 1.8 per cent on the previous year.
  • Consumer spending, supported by a falling saving ratio, has been the biggest driver of recent growth.
  • The latest data suggests that business investment is recovering.
  • Housing market indicators have picked up sharply.
  • But export performance remains disappointing.
  • Given the momentum the economy carried into 2014, we have revised our GDP growth forecast up slightly to 2.7 per cent in 2014 and 2.3 per cent in 2015.
  • We expect quarterly growth rates to ease through 2014 as consumer spending growth slows to rates more aligned with household income growth.
  • The outlook for productivity growth, which underpins income growth and the sustainability of the recovery, remains the key uncertainty.

Whilst this is positive news let us hope that we are not led into another “boom and bust” scenario fuelled by unsustainable property prices and consumer expenditure funded by lower savings and increased household debt.

Hopefully, Government will see the sense in stimulating business investment, encouraging productivity growth, and supporting our exporters.

Don\’t forget to claim Employment Allowance

Employers are reminded to claim the £2,000 Employment Allowance which commenced 6 April 2014. Basically, employers can reduce their National Insurance contributions by a maximum £2,000 in the current tax year.

 Here’s the instructions on claiming the allowance as posted on GOV.UK’s website:

 “You can use your own 2014 to 2015 payroll software (see your software provider’s instructions), or HM Revenue and Customs’ (HMRC’s) Basic PAYE Tools for 2014 to 2015 to claim the Employment Allowance.

 When you make your claim (using the software of your choice), you must reduce your employer Class 1 NICs payment by an amount of Employment Allowance equal to your employer Class 1 NICs due, but not more than £2,000 per year.

 For example, if your employer Class 1 NICs are £1,200 each month, in April your Employment Allowance used will be £1,200 and in May £800, as the maximum is capped at £2,000.”

 Naturally, if we look after your payroll we will take care of these formalities for you.

 The following employers cannot claim the allowance, for instance if you:

  • employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker
  • already claim the allowance through a connected company or charity
  • are a public authority, this includes; local, district, town and parish councils
  • carry out functions either wholly or mainly of a public nature (unless you have charitable status), for example:

    • NHS services
    • General Practitioner services
    • the managing of housing stock owned by or for a local council
    • providing a meals on wheels service for a local council
    • refuse collection for a local council
    • prison services
    • collecting debt for a government department

If you are unsure if you are entitled to claim we would be happy to discuss your options.

Investing in plant and equipment?

If expenditure on plant and equipment qualifies for the Annual Investment Allowance (AIA) 100% of the cost can be written off against taxable profits.

The amount that can be written off as AIA expenditure has changed a number of times in the past few years.

  • Immediately before 31 December 2012 the (AIA) was set at a maximum spend of £25,000.
  • From 1 January 2013 the £25,000 limit was increased to £250,000 for a temporary period of two years to 31 December 2014.
  • The Budget 2014 has increased the limit again, to £500,000 from 6 April 2014 (for unincorporated businesses) and 1 April 2014 (for companies). This further, temporary increase will end 31 December 2015 when it is assumed the limit will return to £25,000.

According to the Office for Budget Responsibility the increase to £500,000 will bring forward business investment decisions amounting to £1bn, from 2016 and 2017 to 2014 and 2015.

Readers who are contemplating significant business investment in plant and machinery should seek tax advice before making any buy decisions. Depending on your accounts year end date, the amount of tax relief you may qualify for may be reduced if the date straddles the 1st or 6th April 2014.

Lifestyle victory for taxi driver and his family

Glen Whittle must be feeling pleased with the outcome of his recent appeal against assessments issued by HMRC.

An enquiry instigated by HMRC resulted in the issue of assessments on the basis that the income of Mr & Mrs Whittle was insufficient to meet their outgoings. HMRCs argument centred on the level of household and holiday costs.

Fortunately, Mr & Mrs Whittle were able to prove that their actual expenditures, rather than those estimated by HMRC, were much lower. For example they were able to demonstrate that:

  • Only one of two daughters was at school, the other worked and had made a contribution to the household budget.
  • Mrs Whittle was employed by a travel agent and had secured unusual terms and conditions. She was absent from home for lengthy periods and received an allowance and discounted flights.
  • The family home was eco-friendly with consequent savings in running costs.
  • HMRC had also failed to adjust their figures to account for Mrs Whittle’s significant absences.

 The tribunal accepted the accounts of personal income and expenditure presented by the Whittle family and their appeal was allowed.

 Readers who are thrifty, or whose personal circumstances mean that their outgoing are below the norm, should keep records to justify their position. In Glen Whittle’s case this has paid dividends.

What has not changed since the Budget?

  

  • Entrepreneurs’ Relief 

As long as the ownership of your business is structured correctly, and for a minimum time period, then lifetime disposals not exceeding £10m will only be taxed at 10% for Capital Gains Tax purposes.

 

  • Cap on tax reliefs 

Don’t forget that certain tax reliefs are capped at £50,000 or 25% of your income. The reliefs affected are predominantly tax losses. There is no cap on charitable donations.

 

  • Loss of personal allowance 

Care should be taken if your taxable income is likely to exceed £100,000 in the current tax year. For every £2 your income exceeds £100,000 your Personal Allowance (PA) will be reduced by £1. For 2014-15, this means that your PA will be withdrawn completely if your income exceeds £120,000.

 

  • Carry back charitable donations 

It is possible to carry back charitable donations made in the tax year 2014-15 to the previous year, 2013-14. The claim to carry back must be made before or at the same time as you complete your tax return for the earlier year. The latest date you can make a claim is the statutory filing deadline. For the 2013-14 return this is 31 October 2014 if you file a paper return, or 31 January 2015 if you file your return electronically.

 

  • Inheritance Tax (IHT) lifetime gifts

It is still possible to make lifetime gifts of any amount to an individual as long as there are no strings attached. The amount of the gift that will be included in your estate for IHT purposes may gradually reduce over time. If you live for more than seven years after the gift was made, then it will be excluded completely from IHT. If the gift becomes taxable on your death, then any tax payable on it is reduced if you survive it by at least 3 years.

 

These are just a few of the existing planning matters that you could or should consider. However, everyone’s circumstances are different and if your financial affairs are complex you should consider a formal tax planning consultation, which we would be delighted to undertake for you.