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Best Way to Get Startup Tax Advice in the UK

One of the biggest problems that startup businesses face is that they register or prepare for tax.  HMRC do make it relatively easy to register your business online once you have completed a few checks through Companies House with regards to business name.  And once you have registered, you can then start looking at tax, what you might need to pay but also any tax credits your business might be eligible for, such as for research and development.

Tax and national insurance

The two basic types of business tax UK currently levy on every type of company is tax and national insurance.  Tax is paid on profits while national insurance is paid on profits starting from a lower amount and is paid for employees of the business as well as an employer.

If you are self-employed as a sole trader, then you will pay tax on business profits as well as Class 2 and Class 4 national insurance – employer and employee for want of a different way to put it.  When you run a limited company with employees, you must pay income tax through the Pay As You Earn or PAYE scheme and also Corporation Tax as well as national insurance contributions.  Depending on the earnings of the business, it may also pay to register for VAT where you submit a quarterly return for payments and receipts of VAT.

Bookkeeping

The way that you know what tax and national insurance is going to be due when starting a new business UK based is via your bookkeeping.  There are lots of different ways to do this from the traditional paper and pen ledger through to simple spreadsheets and onto more complicated account software.  But whatever system you use, it should start from day one.

Legally, a business or sole trader much maintain accurate financial records that detail all the money entering and leaving the business.  According to Start Up Donut, these records should be kept for at least six years, even if the business stops trading.

The main components of a bookkeeping system include a cash book, a sales ledger, purchased ledger and a wages book.  Most of this can now be computerised, although a cash book is often required if the business uses petty cash to buy supplies such as milk and sugar for the office kitchen or occasional office supplies.  Some accountancy software can connect to the business’ bank account and automatically record all transactions, allowing you to dictate what they relate to and to exclude any person transactions for a sole trader.

Completing a tax return

Another area that many startups fall afoul of in their first year is completing a tax return.  While the self-assessment system makes it theoretically easy to complete the relevant information, see what tax you owe and sort out the payment, the emphasis is entirely on the person completing the form to make sure it is right.  If anything goes wrong, you will be liable for the consequences.

For this reason, it can often be a good idea to get someone to either complete the form on your behalf or to double check all the information before submitting it.  If the business has appointed an accountant to handle all the bookkeeping issues, then they will deal with this but otherwise, it may be worth seeking a professional for this area.

You can also speak to an expert in tax advice UK rules who can tell you if there are any extras you may be able to claim for or schemes that your business might qualify for that could lessen the tax you need to pay and even get you a tax credit.  Examples include machinery, fixtures and fittings for the premises which are claimed as a capital allowance.  Money spent to create the business can sometimes also qualify as this type of expense.

Qualifying for R&D tax credit

A perfect example of this is the research and development tax credit scheme the government currently operates.  This is designed to give businesses who are working to research and develop things in the area of science or technology a refund of monies paid in this research.  The great thing is that the research doesn’t even need to be a success to qualify – but it does need to meet certain criteria to do so.

Again, businesses don’t need to do this alone.  There are specialists such as Easy R&D who can look at the work done by the business and advise if it qualifies for the tax credit.  If it does, you can claim for expenses such as materials used in the R&D and staff wages when working on these projects.  Even a portion of utilities and other expenses can be claimed for and the repayment for small businesses is up to 33% of the qualifying R&D costs.

Registering for VAT

Another big decision that sometimes can affect a startup business in its first year is whether or not to register for VAT.  Value Added Tax or VAT is charged on most goods and services in the UK and also on some imported from the EU and outside it.  Businesses making more than £85,000 automatically have to register for it.

VAT is something of a cycle – a business pays it on goods bought and charges it on goods sold, for example.  The idea is that the two equal out but if they don’t then a business can owe or be owed a payment from HMRC.

There are two main reasons to voluntarily register for VAT if your business doesn’t make this figure.  One reason is if customers are predominantly other VAT registered businesses so it makes no real difference whether your business is VAT registered or not.  The other is if you often find your business would be in a refund position and by registering, you can recoup this money from HMRC.

Conclusion

Getting the right tax advice is often key for new businesses.  It can help understand when you can expand, add new product ranges and try new markets as well as ensuring you are always on top of the amount of tax you will need to pay each year.

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 

R&D Tax Relief Really Works

Whether you are a new business or an established one, research and development can be key to the business developing.  Working on solving problems and developing new products can make the difference between success and failure for a business.  And also now the business can claim money from the government towards the cost of this work – in the form of R&D tax credit HMRC issue.  But what is the system and does it really work?

Changing face of R&D

Back in the early 2000’s, research and development in the UK was at something of a low.  The amount of research being done was steadily declining and the government decided that something needed to be done.  R&D has a big impact on GDP and the UK’s was some 30% less than countries such as France, USA and Germany.  There was also an innovative gap mirroring a productivity gap that means the country was spending less on research than others and had been since the 1980’s.  So what could they do?

They opted for a R&D tax incentive that would reward companies of all sizes that embarked on qualifying research and development by refunding them the money paid out on the research and also a percentage on top of this.  And it worked – the figure for 2009 versus the predicted figure before the new credit was brought in 2008 clearly showed an increase in the amount of research and development conducted.  In fact, there was around 50% more research conducted and an increase in innovation of around 60% due to the new policy.

Getting R&D tax credits

The success of the policy has continued and is clearly why the government not only kept it in place but increased the amount of funding it puts aside for it – almost doubling the amount.  This means an increasing number of companies can receive R&D tax credits to help with the costs of the work they are doing and allowing them to start a project that might be put on the back burner without this extra help.

So how do you know if your business can qualify for the scheme and how much could it be worth to you if you do?  Let’s take a look at the meat of the R&D Tax Relief system.

Step one – Small and Medium or Large?

The first step in seeing if your company qualifies under the Small and Medium Enterprise or the Large Company area of the tax relief.  The cut-off point is either 500 staff or a turnover of less than €100 million or gross assets of less than €86 million.  Once you know if you are an SME or a large company under this definition, you can get an idea how much the tax relief could be worth for your company.

For SME’s, the amount of tax relief you can reclaim is up to 33% of the qualifying R&D spend.   You don’t even have to have made a profit to claim the relief – you can either receive it as a credit towards the following year’s tax bill or even surrender it for cash at a rate of 14.5% of the qualifying R&D costs. For large companies, the amount claimable is up to 9.7% of the qualifying R&D spend.

Step two – what qualifies as R&D?

The next step is understanding if the work your company does qualifies as research and development because not everything does.  For example, the work must either create new products, services or processes or change or modifying an existing product, service or process.  The research doesn’t need to be a success to qualify for the credit but it can’t be in anything other than science and technology – it excludes areas such as social sciences, economics and arts.

The project needs to be more than just commercially innovative – it needs to be a genuine advance to existing knowledge.  This might mean clearing up something we are currently unsure about or adding to the knowledge on the topic that will eventually lead to clearing up the uncertainty.  It also needs to have a firm method to it that means it is a clear research and development project.  This in turn leads to what you can claim for under the tax relief system.

Step three – what you can claim for?

Once you know how much you can claim and that your work qualifies under the scheme you then need to know exactly what costs can be claimed for under the scheme.

Perhaps the big one is the cost of employees’ wages for those people involved directly with the project – so if three people are working full time on the R&D, then you can claim for their wages.

The materials used in the research are the other big thing that can be claimed for under the tax relief.  These are physical materials that are used in the work rather than abstracts such as data costs or telecoms bills.  However, there is an allowance for utilities used for the project and software purchased specifically for the work.

Conclusion

There’s no doubt that R&D tax credits really work for a large number of businesses but an even larger number don’t make a claim because they don’t realise that they can or that it is worth it for them.  That’s why Easy R&D now offer a service that can help you go through these steps to see if the work being done qualifies for the credit and, if it does, how you can claim back that tax relief.  It takes the guesswork out of the process and ensures that you quickly get the credits due to your business.

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 

Qualifying for R&D Tax Relief

There’s nothing nicer than finding out that HMRC owes you money and you are due a tax rebate.  The downside of it is often that this is money you have already paid them so it isn’t exactly a gain, simply a return!  However, there is now a system where a business can not only get a refund of money paid but also a substantial amount on top of this – it is known as the R&D Tax Credit system.  But how do you know if your business can qualify for it?

What is the R&D Tax Credit?

The system of R&D tax credits was introduced back in 2008.  At the time, research and development was at something of a lull in the country and the government recognised that it was key to help boost the economy.  They introduced the system to encourage businesses to involve themselves in projects that they otherwise might not have embarked on due to financial constraints or the fear of failure.

The system is two tier – one level for small and medium enterprises and the other for large companies.  The split between the two is either having less than 500 employees and either an annual turnover less than €100 million or a balance sheet under €86 million.  Any business with over these amounts is classed as a large company with slightly different rules and amounts they can claim.

How much is the credit worth?

Currently, for small and medium enterprises (SMEs) the rate of the research and development tax credit is up to 33% of the qualifying R&D spend.

Another big benefit about the system is that the company doesn’t have to be paying tax to claim the credit.  There are two options available for a business that doesn’t make enough money to pay tax – either keep it as a credit towards next year’s probable tax bill or have the money as a tax credit that is refunded to the business.  This might be particularly useful if the business is experiencing some financial problems and needs an injection of cash.

Understanding if your business qualifies

One of the main reasons that businesses don’t claim for this tax credit is that they don’t understand what can qualify under the scheme or that they think the work that they do wouldn’t be classed as research and development.

One of the main misconceptions is that the work needs to involve some sort of laboratory work to qualify for the tax.  But this isn’t the whole picture – many companies have made a claim where they are researching software development, for example.  Other examples of research and development projects that have been authorised for the credit by HMRC include:

  • New web-based customer relationship management systems
  • Bespoke time recording and billing systems
  • Translation software
  • iPad and iPhone applications

So how could these items qualify as research and development, you might wonder?  Because they are either making an improvement on existing knowledge or are resolving a scientific or technological uncertainty.

The definition of R&D

For a project to qualify, it must first have a clear start and finish date rather than simply a random discovery during the course of other work.  This shows a system whereby the discovery was made using some form of process that can be documented and repeated if required.  This doesn’t mean that you need to be the only company working on the project either – ten other companies could be working towards the development at the same time.  As long as you qualify as a project and show that you have added to the existing knowledge or developed something new, then you will qualify for the credit.

Another point is that the project doesn’t have to be a success to qualify.  Failure is as important as success in research and development because it teaches us something every time.  Option A might not have worked but with what was learned, we can then go to onto Option B which has a better chance of success.  So even unsuccessful projects can qualify for the credit.

One stipulation is that the project must be ‘trade related’.  What this means is that it is relevant to either the existing trade of the business or an area they are expanding into.  To qualify for this, the company must be involved in or in the process of beginning to produce goods or services to customers in the area that the R&D is being carried out.  Of course, this is quite a broad definition – a company could develop its own internal software system and qualify because it has enhanced the existing knowledge in that area.

What can be claimed for?

Knowing that you can claim for the tax credit is only part of the process – you also need to know what can be claimed for to make your claim.  There are quite a few areas that can be claimed for under the tax credit and a few exclusions:

  • Staff costs – the cost of staff wages for the time spent working on the project based on their gross salaries. Information about the background of the individual is required along with information about what they did
  • Software – any software purchased for the project can be claimed for
  • Materials – any materials used in the project can be included in the claim as long as they are actual physical materials consumed in the work rather than telecommunications or data costs
  • Utilities – power, water and other utilities used in connection with the project can be included in the claim

There are a few exclusions, such as staff who are not contracted directly with the company but there is also a provision regarding staff used through a staff provider.

Conclusion

Claiming for R&D tax credits can be a little complicated and this is why many businesses turn to an expert in the area to ensure their claim qualifies and that they claim for everything applicable.  But the results in making the claim can help the business continue to work in research and development going forward as well as helping the economy.

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