For many businesses, a constant job is to look for ways to reduce taxes without overstepping boundaries or breaking rules. The old advert that HMRC ran about ‘tax doesn’t have to be taxing’ is a bit of a laugh for most businesses – or a grimace. Yet there are ways to reduce how much tax the business pays and also schemes that can get a business a tax credit. One of those is the R&D tax relief system.
Basics ways to cut tax
As a rule, any cost that is ‘wholly and exclusively’ due to your business can be deducted as expenses from your income and therefore, reduces down how much tax you have to pay. This can be a little more complicated where business and personal expenses are all wrapped up together so records need to be kept.
For example, if a work from home freelancer uses the landline 50% of the time for business calls and the rest for personal, they can only claim for half of the cost of the phone line rental and the cost of calls that are relating to the business. Similarly, a car used for both private and business use can be claimed for to the degree that it is used for business – say this is one third of all journeys so 33% of costs can go down for the business.
There are lots of other ways to look at how to reduce taxable income within the rules. Stationary, postage, costs of meals and drinks while away from home on business and even some entertainment costs can be included legitimately, though paperwork to support everything should be collected and kept for six years after the accounting period.
Another way to reduce how much tax you need to pay is for items bought for the business, which are called capital expenditure. There are many examples depending on the nature of the business but these could be things like computers, office equipment and even the cost of buying a business premises.
If you are a window cleaner and buy ladders, racks for the van to carry the ladders and other equipment such as buckets and cleaning gear, this will all count as capital expenditure. Basically, it is anything that the business needs but that isn’t bought on a regular basis.
R&D Tax Relief
One of the big ways that businesses can reduce their tax bill is through the R&D Tax Relief system but many companies don’t realise it exists or don’t think it could apply to them. The system is part of the Corporation Tax system and offers tax relief for businesses conducting research and development in areas of technology or scientific area.
But how do you know if the work your business is doing counts as research and development? For starters, the work must be within the company’s trade, either an existing one or an area that will be started as a result of the research work. It must be:
- A project that advances science or technology
- Must contribute directly to existing knowledge
- Or solve a current scientific or technological uncertainty
To qualify as scientific, it must not be in the arts, humanities or social sciences and must be more than just commercially innovative. If it is solving an existing uncertainty, it must look at whether something is feasible, how to achieve it in practice or work on something that isn’t already available. It must also be easy for a non-expert to see how the uncertainty has been solved or knowledge on the topic improved by the work.
How much is the tax relief worth?
There are two different tiers for the payment of the tax relief – small and medium enterprises (SMEs) and large enterprises.
An SME is a company with less than 500 employees and either an annual turnover less than €100 million or a balance sheet less than €86 million. It is a little different from the definition under other areas such as for Corporation Tax or by HMRC. Companies who exceed these limits are classed as large enterprises – Easy R&D focus on the R&D tax credit SME scheme.
For small and medium sized businesses, the tax relief for research and development is 33% of R&D qualifying costs, or a loss can be surrendered at a rate of 14.5%.
What can it be claimed for?
Like normal tax deductible expenses, there are things that the business can claim for under the scheme and others that they can’t. For example, the cost of staff wages for those working on the R&D project can be claimed as long as they aren’t consultants, agency workers or people who have a contract with someone else. There are some subcontractors that can qualify.
Materials can also be claimed for, providing they are used for the project even if they are consumed but don’t include things such as data or telecommunications costs. Utilities such as power, water and fuel used directly for the work can be claimed for as can computer software used on the project.
While capital expenditure would cover investments made for the business, there are also some areas where you can claim R&D capital allowances for some purchases made for the project.
While it may sound complicated, the R&D Tax Relief can be simplified by using the services of an expert in claiming these credits. This can result in the business receiving a large and very useful credit or even payment towards the cost of work they are doing and may allow the business to continue to develop or research something going forward.
Easy R&D have helped hundreds of companies to make R&D tax relief claims. Contact your nearest R&D Consultant to see if you can claim – 0800 195 7516.