The Fizz! Blog

Clampdown on R&D incentives on the way?

It's being suggested that the Revenue may start looking harder at claims for Research and Development Tax Credit, to try and restrict the amount they pay out.  Historically, despite one or two high profile cases where companies have plainly tried it on and claimed when they're not entitled, the Revenue have always been reasonably happy to dish out R&D credits without too much scrutiny. I suspect that means that a lot of suspect claims are paid out without question, so I'm not surprised if it's an area they've decided they should look at more closely.

Of course, if you're entitled to the credit then a more vigorous claim inspection shouldn't deter you - but if you're relying on a cash repayment, it might be sensible to budget for receiving it a month or two later than you'd normally anticipate it.

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Dragonfly - a storm in a teacup?

There's been a lot of fuss in the last couple of weeks about a court decision that could adversely affect many contractors working via limited companies.

The company concerned is called Dragonfly Consulting Limited, and it has lost a long running battle with the Revenue.  The company has been found to fall foul of IR35.  IR35 is a rule that says that if an individual is working for another entity doing what is, to all intents and purposes, a job, then, even if the individual forms a limited company which sits between him and that other entity, then tax and National Insurance must be paid as if the individual were are an employee of the entity.  In other words, the individual loses the tax benefits of having their own limited company, and suffers the higher tax burden of an employee.

The central point in the Dragonfly was a "substitution clause" in a contract - a commonly used device that states that the individual can send someone else to do the work if they want.  This is a good pointer that the relationship is not a job - if you're an employee, you can't just send someone else in to work to do your job for you, generally.  However, in the case of Dragonfly, the end customer essentially told the court "Well, yes, the contract says that, but in reality he has to come in and do the work himself, and he knows that".  So the clause was set aside as it didn't actually reflect the real relationship.

There's more detailed discussion of the case at AccountingWeb (free registration required), where it's argued that the case has strengthened the taxman's hand.  In particular it is suggested that contractors and advisers now need to take much more care to ensure that substitution clauses are realistic and workable.

However, I don't really agree with that part of their analysis. It's always been the case that, under IR35, you can only rely upon a contract if it accurately reflects the real relationship between you and your client.  If the contract is a sham, or there are parts in it that are for show, with both parties knowing that they don't reflect the real terms of engagement, then the contract (or that part of it that is unrealistic) can be set aside.  Since IR35 came in, competent tax advisers have been telling their clients that a substitution clause is great, but that if the customer wouldn't accept a substitute in real life then it's not worth the paper it's written on.  So, in my view, nothing has really changed.

If you're worried by the implications of Dragonfly, do give us a call.

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Research and Development - changes next month

As announced in the Budget, from 1 April the tax incentives for R&D expenditure become more attractive.  They were pretty generous before, and there's now an even better opportunity for companies engaged in R&D to get a really desirable tax break.  What counts as R&D is not black and white, and the taxman will often query a claim.  However, at Fizz we have lots and lots of experience of successful claims of the credit, and successful negotiation if claims are enquired into, so if you'd like to know more about how you could benefit, give us a call.

Also, there's a significant deadline at the end of this month for backdating claims - if this applies to you, get your skates on!

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How the government supports Small and Medium Enterprises

I was with a client all day yesterday, and I only actually heard about a minute of the Chancellor's budget speech.  This was the bit I heard:

A competitive and simplified tax regime is essential.

That is why we cut the main rate of corporation tax in 1997 and again in 1999.

And from next month the main corporation tax rate falls again from 30 per cent to 28 per cent.

Mr Deputy Speaker, the UK is one of the best places in the world to do business. We are committed to consultation with business to maintain a stable business tax system that remains responsive to business’ needs and internationally competitive.

Underlining our commitment to maximising the economic recovery of the UK's oil and gas reserves, I can also confirm reforms to the North Sea fiscal regime to help incentivise investment and support production.

But today I also want to do more to support Small and Medium Enterprises now and in the longer term.

13 million people work in Small and Medium Enterprises. And there are over 750,000 more firms than in 1997.

The new Capital Gains Tax rate will come in next month including the entrepreneurs’ relief I announced in January.

And that will benefit over 80,000 businesses and investors in the next year alone – 90 per cent will continue to pay Capital Gains Tax at 10 per cent – one of the lowest rates in the world.

This Budget continues a programme of tax simplification. I am today announcing further steps to help small companies simplify their tax calculations.

Mr Deputy Speaker, especially at this time we need to do more to help Small and Medium Enterprises get access to the finance they need.

To help them in current conditions, I can therefore announce that funds available through the Small Firms Loan Guarantee scheme will be increased by £60 million for the coming year.

And I am from next month extending the scheme to small and medium firms.

Can you spot what's missing here?  The Chancellor tells us about the reduction in corporation tax for large companies to 28%, as already announced in the Pre-Budget Report, and he tells us how important SMEs are.  But there's no mention at all of the increase in corporation tax for small companies to 21% from 1 April.  The claim that the Chancellor wants to supports SMEs is undermined somewhat by that tax increase - it dwarfs any extra funds made available under the Small Firms Loan Guarantee Scheme.  As ever, the good news gets repeated, the bad news gets buried or twisted.

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Investing in fixed assets soon? Get the timing right!

The rules for capital allowances are about to change, and the standard advice for investing in new assets is turned on its head this year.

In accounts, when a business buys an asset - say, a van - it doesn't show the whole cost as an expense in its profit and loss account straight away.  Instead, it has to spread the cost over a number of years.  This is called depreciation, and the aim is to match the cost of the van with the income it generates.  Estimating the depreciation each year is down to the directors, but typically you do something like spreading the cost over four years.

Unlike most of the costs in the profit and loss account, you don't get tax relief for depreciation.  That's because, if you did, many businesses would probably suddenly decide to spread the cost of the van over one or two years so as to get tax relief sooner.  Instead, you have to claim something called Capital allowances - they are the standard Revenue and Custom subsititute for depreciation.  They have historically given tax relief by giving you credit for quite a bit of the cost in year one, less in year two, even less in year three, and so on.

So, the standard advice to a company thinking of buying a van around the end of its accounting year has always been - buy it before the year-end so as to start the tax relief process sooner.  If a company with a 31 March 2007 year-end bought the van on 29 March, it got its first batch of Capital Allowances in the year ended 31 March 2007 and reduced a tax bill payable on 1 January 2008.  If it bought it on 1 April 2007 then it didn't get its first Capital Allowances until the year ended 31 March 2008, reducing a tax bill payable on January 2009.  In other words, by delaying the purchase by three days it delayed tax relief by a whole year.

But, from 1 April (6 April for sole traders and partnerships), a business can get complete, 100% relief for the first £50,000 of assets purchased in a year.  So, if the same company buys a van on 29 March 2008, it'll get a bit of tax relief in the year ending 31 March 2008, a bit in the year ending 31 March 2009, a bit in 2010, and so on.  If it delays the purchase until 1 April 2008, it'll get tax relief for the entire purchase in the year ending 31 March 2009.  That's likely to be a much better choice.

Circumstances may vary from company to company, and there are other changes to Capital Allowances beyond this one, but it's definitely right to say that any company thinking of investing in fixed assets in March and April should look carefully at the timing of the purchase to optimise the tax relief they get.  If you'd like to talk to us, we'd love to hear from you.

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The R&D Tax Credit - claim for past years now

A tax incentive called the Research and Development Tax Credit is available for UK companies that engage in R&D.  It's actually a really good incentive - in broad terms, every £1 an SME spends on R&D is treated as £1.50 for tax purposes (the rules are a bit less generous for large companies).  For profitable businesses, this decreases taxable profit and therefore the corporation tax bill.  Loss making businesses, who have no tax bill to reduce, can get cash back instead.  That's important, because many of the heaviest investors in R&D are early-stage companies who have yet to make any sales.

Since the credit came in, companies have had six years to make the claim.  I don't know why the rules were so generous; for most corporation tax purposes you only have two years from the end of the year to make and amend claims.  Perhaps there was a feeling that companies or advisors wouldn't be well informed about the credit so needed plenty of time before the window closed.  In any case, in a couple of months that's changing, and you'll have two years to make the claim.  31 March 2008 is the final day to make claims for the years 31 March 2002 to 31 March 2006.  After that, you're stuck.

At Fizz we have plenty of experience of successfully making claims for the R&D tax credit, so if you think your business might qualify, give us a call.

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I don't like agreeing with the taxman, but...

The Telegraph claims that the failure to increase the tax-free allowance of 40p a mile for using your own car in your job amounts to a stealth tax.  Apparently the average cost of motoring is now 44p a mile and therefore "millions" of car drivers are losing out.

Now, in general I can't stand stealth taxes and am always quick to point them out.  But to claim that this is a stealth tax is rubbish.

Although lots of people will come up with reasons why this doesn't apply to them, I would suggest that nobody has to pay more than 40p a mile to run a car.  It's perfectly possible to run a car that's adequate for any more or less any purpose for less than that amount.

When I was a recently qualified accountant, I went on secondment to a client.  I drove there four days a week, a 130 mile round trip, and got 40p a mile for my trouble.  This was in 2001, I think, so it's right to say that the 40p hasn't gone up for a long while.  I calculated that, at the time, my car was costing me 15p a mile to run, all in, or something like that - petrol was cheaper then, and my servicing and repair bills were really low.  So four days a week I was being given £52 in mileage and it was costing me just £19.50.  On the basis that I was doing that 20 times a month, I was profiting by £650 a month, tax-free!  In the six months I was on secondment at that client I had more money in my pocket than I ever had before, and probably more than I did for the next few years.

The reason, of course, was that my car - while reliable - had little (almost zero in fact) capital value.  It's depreciation that is often a big chunk of your motoring expenses.  And if you are running a new or expensive car, you must accept that you are choosing to do that.  It isn't necessary, and you can't blame the government if they won't let your employer reimburse all your costs!

I am not saying that it is bad to run a new/expensive car, and that anyone driving an older/cheaper/more fuel efficient car has the moral high ground - that may be the case, but it's not necessary to sustain the point that I am making.  I am saying that you are choosing to incur extra costs, because of some non-financial benefit that - knowingly or not - you believe that the car gives you.  If you love cars, and drive a Ferrari costing you £1.50 a mile, that is absolutely fine with me - but it isn't reasonable to expect the taxpayer to subsidise it!  Bluntly, anyone who buys a new car, claiming it's because it is more reliable, or the running costs are lower than their last one is generally talking nonsense.  They just wanted a new car and are making up spurious benefits to justify it to you - and to themself.

I've done a quick back of the envelope calculation of my motoring costs for the last year.  I reckon my car cost me 29p a mile for the 10,000-odd miles I've done.  The key thing is that I reckon my car has only depreciated in value by £1,000 in the year.   If it had depreciated by £5,000 it would cost me well over 40p a mile.  But as things stand, most people could do what I'm doing and be ahead.  Clearly this isn't a stealth tax - I can completely avoid paying it!

So, I would suggest that, rather than seeing the 40p a mile rate as a stealth tax, you should see it as an opportunity to have your motoring costs subsidised by the taxpayer!  See the glass as half full, not half empty.