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Tax planning for SMEs Corporation Tax: R&D relief and Patent Box June 2013 John Foskett Associate Director john. PowerPoint Presentation
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Tax planning for SMEs Corporation Tax: R&D relief and Patent Box June 2013 John Foskett Associate Director john.a.foskett@uk.gt.com. Overview. Research & Development Tax Relief What is Research & Development Relief? Q ualifying criteria The b enefits Obtaining the benefits

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slide1

Tax planning for SMEsCorporation Tax: R&D relief and Patent Box June 2013John FoskettAssociate Director john.a.foskett@uk.gt.com

overview
Overview

Research & Development Tax Relief

  • What is Research & Development Relief?
  • Qualifying criteria
  • The benefits
  • Obtaining the benefits

The Patent Box Regime

  • What is the Patent Box?
  • Qualifying criteria
  • The benefits
  • Obtaining the benefits
  • Anti- Avoidance
research and development tax relief and credits
Research and Development Tax Relief and Credits
  • A government measure to incentivise companies to invest in R & D activities by allowing the claim of relief on qualifying costs
  • Applicable to a variety of sectors:-
    • Pharmaceutical
    • Medical products
    • Manufacturing
    • Engineering
    • Automotive
    • Construction
    • Software
research and development the qualifying criteria
Research and Development – The Qualifying Criteria
  • "A project must seek to achieve an advance in science or technology … through the resolution ofscientific or technological uncertainty"
  • This means "an advance in overall knowledge or capabilityin a field of science or technology (not a company's own state of knowledge or capability alone)"
  • A project which seeks to make an appreciable improvement
categories of q ualifying e xpenditure
Categories of Qualifying Expenditure

Large SME

  • staffing costs
  • externally provided workers
  • consumable items includes waterfuel and power and computer software
  • subcontracted expenditure
small or medium enterprise definition
Small or medium enterprise - definition

An SME company meets the following tests:

  • Number of employees ≤ 500 and
  • Turnover ≤ €100m or
  • Balance sheet total ≤ €86m.
the benefits
The Benefits
  • Tax relief for companies with an R & D spend that are undertaking a qualifying R & D activity.
  • 225% relief for expenditure incurred on or after 1 April 2012 by SME's and 130% for large companies.
  • 100% allowance for R & D capital expenditure.
the benefits1
The Benefits
  • Additionally, SME's can "trade in" their R & D capital losses and receive 25p for each £1 spent on qualifying R & D from 1 April 2012
  • Government becoming increasingly generous reflecting its intention to support knowledge economy
further issues benefits
Further issues/benefits
  • No minimum spend
  • Routine work may be allowed (part of wider project)
  • Production costs
  • Agency workers
  • No PAYE/NIC cap for SME companies
  • Above line credit for large companies (enabling a 'trade in' similar to that for SMEs) from 1 April 2013
obtaining benefits
Obtaining Benefits
  • Any claim for R & D relief must be made in a Company Tax Return or amended return
  • Must be made within two years after end of the relevant Corporation Tax period
  • Ensure identification of all R & D activities within company
  • Review commonly missed areas of claim
  • Ensure understanding of latest changes in R & D
overview1
Overview
  • ''Encourage companies to locate the high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK''HM Treasury
  • "To create the most competitive corporate tax regime in the G20"

The Coalition Government

the qualifying income
The Qualifying Income
  • Sales of patented items or "sale of products incorporating a patented invention"
  • Licence fees or royalties from qualifying IP
  • Income arising on the sale of patents
  • Income arising from infringement of IP rights
  • Notional arm's length royalty income for using qualifying IP in a process or services
the benefits2
The Benefits
  • Allows companies to apply a lower rate of Corporation Tax earned on profits after 1 April 2013 from its patents
  • An effective 10% tax rate by 2017
obtaining benefits1
Obtaining benefits
  • Elect in via corporation tax return.
  • Relief to be phased in from 1 April 2013 ….

…. with full benefit from 1 April 2017

  • Relief available for patents pending in year granted.
  • Complement effect of R&D claims.
targeted anti avoidance r ules cta 2010 ss 357 f 357 fb
Targeted Anti-Avoidance Rules (CTA 2010, ss 357 F – 357 FB)
  • Superfluous exclusivity
  • Superfluous patents in products
  • Schemes to obtain a tax advantage by:
    • Avoiding the operation of a provision
    • Avoiding recognition of income
    • Obtaining a mismatch between income and expenditure
how can grant thornton help
How can Grant Thornton help?

R&D tax credits

  • Identify qualifying projects
  • Assist in the preparation of claims
  • Help maximise your claims

Patent box

  • High level assessment of potential benefit/forecasting the impact of the regime
  • Advice on record keeping
  • Assistance with valuation advice
slide20

Tax planning for SMEsEmployment Tax: Current issues and opportunitiesJune 2013Sharon GilkesAssociate Directorsharon.l.gilkes@uk.gt.com

objectives
Objectives
  • Outline the 'updated HMRC approach to employment tax compliance'
  • Highlight the current HMRC employment tax 'Hot Topics' of review
  • Identify areas opportunities to reduce costs and administration
the importance of employment tax
The importance of employment tax
  • Sizeable proportion of total costs
  • Complex regulations can lead to mistakes
  • Can cause issues with Trade Unions and employees
  • Damaging when things go wrong
updated hmrc approach to employment tax
Updated HMRC approach to employment tax
  • Increasingly proactive
  • New focus from dedicated teams who review specific issues (hairdressers, plumbers, legal firms, NHS)
  • Existing agreements and assumptions
  • Reviewing publicly available information
employment tax hot topics
Employment tax 'Hot Topics'
  • Real Time Information
  • Employment Status
  • Expenses - reporting
  • Termination Payments
real time information managing the impact of rti
Real Time InformationManaging the impact of RTI
  • Review payroll processes and policies to ensure the correct information is submitted to HMRC on time
  • Undertake PAYE review and consider tax and NIC treatment of contentious payments e.g. termination payments, mileage payments
  • HMRC now have unprecedented access to data when assessing PAYE and NIC compliance
  • Targeted reviews will lead to prompted disclosures and penalties
  • 'Light Touch' penalty regime for year one
employment status
Employment Status
  • Based on case law principles - not a matter of choice
  • Consultants, Office Holders, Sub contractors
  • Review contractual arrangements and payment arrangements
  • Important factors taken into account in determining employment status

- Right to control - When, Where, How and What

- Financial Risk – operating as a true business

- Invoice/Payment terms - fixed price, expenses included

- Right of substitution - unqualified right/practical implications

- Part and Parcel of the organisation - desk, Christmas party!

- Work for other clients

  • Employment status framework and decision tree
employment taxes policies
Employment Taxes policies
  • Form P11D Dispensation
    • Agreement with HMRC to ease reporting on forms P11D for specific non-taxable expenses and benefits
    • Reduction in administration
    • Reduction in likelihood of Forms P11D penalty
  • Pay as You Earn Settlement Agreement
    • Agreement with HMRC to account for tax and NIC on expenses and benefits provided to employees
    • Utilise Trivial Benefits concession
  • Expenses and Benefits policy
    • Written policy of business expense claim procedures
    • Manage internal cost control and tax/NIC leakage
expenses income tax and nic reporting how should the expenses be reported
Expenses – Income tax and NIC reportingHow should the expenses be reported?

Expense

Non-Business

Business

Covered by dispensation

Not covered by dispensation

Cash/credit card/pecuniary liability

Employer meets expense

Not reporting

P11D Class A

PAYE/P11D Class 1 NIC

P11D

PSA

No Class 1A Tax Relief via self assessment

termination payments
Termination payments
  • Challenging economic times - relentless press coverage
  • Availability of the Income tax and NIC exemption - S401

- Redundancy - do the facts support redundancy

- Contractual payments - holiday, bonus

- Payments in lieu of Notice - contractual/non-contractual

  • Compromise Agreements and supporting documentation

- Critical Assessment of the termination and the payment(s)

- Mitigation of payments taken into account

  • Take each element in isolation and apply correct tax and NIC treatment
enterprise management incentives scheme
Enterprise Management Incentives Scheme

What's new?

  • 12 month 'Qualifying Period' in order to benefit from entrepreneurs relief will run from the date of grant of the EMI optionrather than the date of exercise of the EMI option
  • Shares acquired on exercise of the EMI option after 6 April 2013 will be able to qualify for entrepreneurs relief even if the individual does not hold 5% of the share capital
  • Potential CGT rate of 10% and not 18% / 28%
enterprise management incentive scheme
Enterprise Management Incentive Scheme

Who will be affected?

Employees

  • EMI options now more attractive to employees
  • Potentially no income tax or NIC on grant or exercise and now subject to very low rate of 10% CGT
  • 12 month holding period starts from date of grant of options for Entrepreneurs Relief purposes.

Employers

  • No longer need to think about issuing options that are exercisable
  • 12 months before a potential sale in order for employees to access Entrepreneurs Relief.
  • Corporation tax deduction on the amount of gain for employer still available
  • No employers NIC on exercise of option
tax efficient benefits using salary sacrifice
Tax Efficient Benefits Using Salary Sacrifice
  • Cost continues to be a major focus and likely to increase
  • There is continued pressure on pay reviews
  • Many employers are revisiting their benefits strategy in

order to generate employment cost savings

  • Linking tax efficient benefits to a salary sacrifice could generate combined savings between 40% - 60% of the value of the benefit, with the benefit being self funded
  • Employees would see a net increase in their disposal income and would benefit from the corporate buying power of the employer/benefit provider
what are the benefits of salary sacrifice
What are the benefits of salary sacrifice?
  • Employer
  • Opportunity to generate annuity savings
  • Improve cost control
  • Enhance the internal and external perception of the employer
  • Differentiate from or align with the competition
  • Delivers attractive benefits to employees at affordable prices
  • Improve recruitment/retention
  • Improve motivation/morale
  • Employee
  • Saving in tax/NIC which increase take home pay and/or disposable income
  • Attractive benefits at affordable price
  • Ability to select benefits which meet personal and lifestyle needs
  • Have access to a range of benefits at corporate rates
example of savings generated by offering low co2 emission cars via salary sacrifice
Example of savings generated by offering low CO2 emission cars via salary sacrifice

Example of employee earning £30,000 pa financing a BMW 118d from net pay, list price £19,800. This has

an annual cost to the employee of £5,398 but which could be obtained by the Company for £5,000 pa.

After

Before

Employee income increases by £1,286 and Employer NIC reduces by £199 (taking into account NIC due

on car benefit).

Total combined savings exceed £1,485 per annum, which can be shared between the Employer and

Employee.

Rates used 2012/13

example of savings generated by offering subsistence allowance payments via salary sacrifice
Example of savings generated by offering Subsistence Allowance payments via salary sacrifice

Example of employee earing £25,000 pa who would be entitled to £1,175 in tax free subsistence

allowance payments per annum based on 235 work days. Subsistence costs are currently being met by the

employee from net pay after payroll deductions. Savings are shared as they arise

Before

After

Employee net income increases by £376 per annum – equivalent to a 2.2% gross pay increase.

Employer NIC /costs reduce by £162 per annum.

Total combined savings £538 per annum.

additional potential benefits
Additional Potential Benefits

Other benefits which could be included which would provide employees with further flexible arrangements as well as generating savings for the employer as well as employees include:

  • Buying/selling holidays
  • Mileage rates (When cash allowances in lieu of car are paid)
  • Health screening
  • Training
  • Car parking
  • Professional subscriptions
  • Private medical/dental insurance
  • Mobile phones
  • Home computers
  • Life Assurance Cover
  • Income Protection/CI cover
slide39

VAT and indirect taxes for SMEsJune 2013Henry Cairns-TerrySenior Managerhenry.a.cairns-terry@uk.gt.com

vat and indirect tax
VAT and indirect tax
  • Registration and deregistration
  • VAT return cycles
  • Specific SME measures
  • Problem areas
vat registration compulsory registration
VAT registration – compulsory registration
  • Historic turnover test (rolling 12 month)
    • Value of taxable supplies in previous 12 months exceeds £79,000
    • Notify within 30 days
    • Registered at end of month following
  • Prospective turnover test (next 30 days)
    • Value of taxable supplies in next 30 days exceeds £79,000
    • Notify within 30 days
    • Registered from beginning of the 30 days.
vat registration compulsory registration1
VAT registration – compulsory registration
  • NB the following when valuing turnover
    • exclude sales of capital assets
    • include turnover under previous ownership for transfers of going concerns (TOGC)
    • margin schemes – margin, not headline turnover
    • certain supplies of long-term accommodation can be excluded.
vat registration compulsory registration2
VAT registration – compulsory registration
  • Exceptions
    • prospective 12 month turnover below £77,000
    • substantially only zero-rated supplies
vat registration voluntary registration
VAT registration – voluntary registration
  • Voluntary registration
    • supplies below registration limit, but want to register anyway, eg to recover VAT on purchases
  • Intending trader registration
    • no taxable supplies yet, but entitlement to recover input tax on 'preparatory acts'
    • irrespective of whether taxable supplies ever in fact made
vat registration anti avoidance
VAT registration – anti-avoidance
  • Disaggregation
    • closely-related businesses artificially split
    • HMRC can issue direction to treat as single taxable person
vat registration other forms
VAT registration – other forms
  • Group registration:
    • bodies corporate under common control
      • >50%
      • UK resident
    • NB joint & several liability
    • Refusal on grounds of Protection of the Revenue
  • Divisional registration
    • one company multiple divisions separately registered
    • no VAT on inter-divisional supplies
    • NB all divisions must be fully taxable
vat registration deregistration
VAT registration - deregistration
  • No further intention of making taxable supplies
  • Turnover next 12 months < £77,000
  • In either case:
    • final VAT return
    • output tax on assets on hand if VAT > £1,000
vat return cycles
VAT return cycles
  • Quarterly staggers
    • March, April or May
    • business can choose, or automatically allocated
  • Monthly returns if chronically in repayment position
    • or if within payments on account regime
  • Worth modelling which format gives best cash flows
  • NB special accounting periods where appropriate
    • must be agreed in advance
specific sme measures cash accounting scheme
Specific SMEmeasures – cash accounting scheme
  • Turnover next 12 months < £1,350,000
  • Benefits
    • automatic relief for VAT on bad debts
    • deferral of VAT on credit sales
  • But
    • input tax can only be claimed on payment
  • Certain supplies have to be dealt with outside the scheme, eg
    • goods bought/sold on hire purchase
    • acquisitions (EC) and imports (non-EC)
  • NB can't be used with a flat-rate scheme
specific sme measures annual accounting
Specific SME measures – annual accounting
  • Turnover next 12 months < £1,350,000
  • Benefits
    • one VAT return per year (extra month to submit)
    • monthly or quarterly payments on account
    • balancing payment with VAT return
  • Can also be used with a flat-rate scheme
specific sme measures flat rate schemes
Specific SMEmeasures – flat-rate schemes
  • Flat-rate scheme for small businesses
    • Turnover < £150,000 pa
    • Flat rates up to 14.5%, dependent on business
    • No credit for input tax, except
      • Capital items costing > £2,000
      • Pre-registration input tax
specific sme measures flat rate schemes1
Specific SMEmeasures – flat-rate schemes
  • Flat-rate scheme for farmers
    • Fixed rate VAT addition of 4% on agricultural sales
      • not other supplies eg sales of equipment
    • No credit for input tax
    • no turnover limit as such, but flat-rate VAT must not exceed 'notional' input tax by > £3,000
      • never a problem below £75,000 turnover
problem areas
Problem areas
  • Partial exemption
    • Standard and special methods
      • NB incidental transactions
    • Override provisions
      • Standard method override
      • Special method override
    • De minimis
    • Capital goods scheme
problem areas1
Problem areas
  • Land & property – two VAT codes
    • Residential
      • Dwellings
      • Relevent residential
      • Relevant charitable
    • Commercial
      • Option to tax
problem areas2
Problem areas
  • Staff expenses
    • Subsistence
    • Staff entertainment
    • Business entertainment
problem areas3
Problem areas
  • Transactions and deal costs
    • Sell side
    • Buy side
    • HMRC challenges
grant thornton
Grant Thornton

John Foskett

john.a.foskett@uk.gt.com

0121 232 5131

Sharon Gilkes

sharon.l.gilkes@uk.gt.com

0121 232 5259

Henry Cairns-Terry

henry.a.cairns-terry@uk.gt.com

0121 232 5173