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Why even accountants find R&D tax credits too complicated

August 10, 2015 by Tax Donut contributor

Why even accountants find R&D tax credits too complicated{{}}For generations, the UK has justifiably been recognised as a hothouse for technological innovation and a big part of that is down to firms' investment in research and development. Successive governments seek to demonstrate their commitment to continuing this tradition, and one initiative that is proven to work is a tax credits incentive for R&D, that can result in either a reduction of tax or a cash repayment, of up to 33% of expenditure on eligible activities.

Unfortunately the current scheme is a complex affair with hundreds of pages of legislation. Many accountants, in-house and external, if not sufficiently experienced in R&D claims, may find it difficult to identify whether their clients have a justifiable claim or know how much can be claimed. And they may not have the confidence or wherewithal to defend it successfully if the claim is challenged by HMRC. It comes as no surprise then that many businesses that have substantial research and development arms now look to specialist advisory firms for advice they can rely on.

Here's the lowdown on R&D tax credits…

The basics

The amount that can be claimed back depends on the size of a business and whether it is profitable or loss making. Let's assume you operate an SME. Currently, if you're making a profit, you can claim a super deduction from your taxable income of 230% in qualifying R&D expenditure, while if you're currently running a loss-making enterprise you can then surrender that enhanced deduction for tax credits at a rate of 14.5% for losses, equating to about 33 pence in the pound.

A typical claimant can receive upwards of £46,000 every year, and you normally go back two years. So far, straightforward enough. Yet many businesses that are eligible – most, in fact – are not submitting claims. Why not?

Hitch #1

HMRC guidance stipulates that to qualify for tax relief, a project "must seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty".

While this makes it sound as though your business needs to be stepping into unknown territory, boldly going forth like the Starship Enterprise, in reality most R&D happens as part of normal product development. And while it's nice to be the only one in the industry working on something, many companies in the same industry can be working on the same thing simultaneously and it's still R&D for them. So many companies are left wondering if their advances and uncertainties apply to the industry as a whole, and therefore if the work qualifies. 

If your business is considering an R&D project, it makes sense to begin with tax relief at the front of your mind, and potentially structuring the project to maximise this advantage. From an accountant's perspective, they typically ask whether the project is "highly innovative" (which it may be commercially but not necessarily technologically, or vice versa), whether it is pushing the boundaries of science or other unhelpful questions, whereas the actual criteria are much broader than that.

Hitch #2

There is another, even greyer area, which may be the biggest reason so many businesses fail to claim for relief. That is that eligible R&D-associated costs can be broad, often stretching across a company's entire operations, and certainly not restricted to just the R&D department. 

Let's say that your product development has 20 software developers or engineers working on a project. Allowable costs will include the relevant part of their salaries of course, for those 20 staff members – something that is often not easy to determine, as well as consumables such as materials used in testing. There will also be a proportion of utilities that can be claimed. But what about the time spent by senior management in coordinating the project?

What about the product managers or implementation team who liaise with live customers to test the product in a real-world environment? What about the hours spent tallying up the various costs involved with the project or recruiting new engineers? These indirect business costs can in certain circumstances all legitimately be claimed for, and could add up to thousands proportionally.

That's why if your business has a significant project on the horizon, be it a submersible smartwatch or anything else, it's a good move to consult a specialist in claiming tax relief for R&D before moving any further forward.

Blog © 2015 Innovation Plus

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How to choose the right invoicing software

July 20, 2015 by Tax Donut contributor

How to choose the right invoicing software{{}}In Terry Pratchett's Wintersmith, one of the characters "read Principles of Accounting all morning, but just to make it interesting, he put lots of dragons in it". You might feel the same when trying to decide which invoicing software to choose for your business. Read this simple five step guide and you'll hopefully have an answer!

1 Needs analysis

You can only solve a problem once you know what's causing it. What exactly is costing your business time and money? Late customer payments? Cash flow problems? Endless meetings with your accountant? Unclaimed tax and expenses?

You don't need a comprehensive list of every minute and penny spent. But a needs analysis will give you a fair idea of where most of your resources are going when it comes to business finances. You can then decide which solution will solve it.

2 Invoicing or accounting?

Invoicing software allows you to create, send and manage invoices. This may well be what you need if you're struggling with overdue payments, a lack of liquidity or keeping track of what money is where.

Accounting software provides a more comprehensive financial overview of how your business is performing. It automatically logs the flow of money in and out of your business. It provides reports for anything from VAT through to expenses and mileage. It acts like a virtual accountant.

3 Freemium or premium?

There's an overwhelming amount of providers out there. So make sure you look beyond any marketing and fancy branding, and decide what's best for you and your business. The free offerings have their uses, but also limitations. They might have their logo on your invoices, or restrict you to a limited number of users or invoices per month. Some lack key features such as recurring payment tools.

Paid packages start from as little as few pounds a month, so if you're serious about managing your business finances, you might want to explore this option. You'll certainly notice the difference.

4 Test the water

You can try most invoicing software options on a free trial. This is great way to test out the functionality of a product and see which one you like best. A deciding factor could well be ease of use.

5 Change is good

Many industries make it difficult for you to change providers (think energy companies or phone networks). Even if there is a better offer elsewhere, it is often expensive or complicated to change. But this isn't the case with invoicing software. If you start with one solution and then discover a better offer elsewhere, it's easy to make the switch. You can migrate all your data with a few simple clicks, and pick up where you left off straightaway. This way you can stay with a service for the right reasons.

Hopefully these tips make it a little easier to decide what invoicing software to go for – even if they don't mention any dragons.

Copyright © 2015 John Hills from

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Summer Budget: Red box reveals mixed bag

July 08, 2015 by Fiona Prior

Summer Budget: Red box reveals mixed bag{{}}Less than four months since his last Budget statement, the chancellor, George Osborne, delivered a second 2015 Budget to Parliament today. The difference this time around is that the chancellor has a majority (albeit slim) Government behind him for the first time in almost 20 years. This gave him the opportunity to deliver on some of the Tory party manifesto promises.

In its manifesto, the Tory party had pledged to hold VAT, National Insurance contributions and Income tax at their current level. But this didn't go far enough for some business leaders. Stephen Herring, head of taxation at the Institute of Directors, said “As the economy continues to recover, both business and individual taxpayers will rightly expect more wide-ranging tax reforms and simplification than the previous Government was able or willing to undertake.

"Businesses, especially SMEs, are concerned about high taxes on employment, commercial property occupation and transactions as well as being convinced that Government ought to try much harder to deliver authentic, far reaching tax simplification."

Speculation ahead of the Budget predicted a slowdown in the pace of cuts, reforms in Sunday Trading rules and an increase in the amount employees could earn before they start paying tax. And, as the first Tory Budget for 19 years, it was generally predicted that there would be a few bold moves.

After a rowdy prime minister's Question Time, the chancellor took a sip of water, cleared his throat and waded in. He announced:

  • Income tax, National Insurance and VAT: As promised in the Tory manifesto, these will be locked at their current rates for the next five years.
  • Corporation tax: Corporation tax will be reduced to 19% from April 2017 and will reduce again to 18% in 2020.
  • Corporation tax: Companies with income over £20 million will pay tax earlier. From April 2017, Corporation tax instalment payments will be due in the third, sixth, ninth and twelfth month of their accounting periods.
  • Annual Investment Allowance: This will be increased to £200,000 and will be fixed for the duration of this Parliament.
  • New compulsory National Living Wage: From April 2016, employers will have to pay employees aged over 25 at least £7.20 per hour. This will increase to £9 per hour by 2020.
  • Employment Allowance: Employers will be able to claim up to £3,000 off their National Insurance payments each year via PAYE from April 2016 – increasing from £2,000.
  • Employment Allowance: From April 2016, companies where the director is the only employee will be unable to claim the Employment Allowance.
  • Dividend Tax Credit: This will be abolished from April 2016 and will be replaced by a tax-free Dividend Allowance of £5,000 per person. Dividends in excess of £5,000 will be charged at 7.5%, 32.5% and 38.1%.
  • Personal Tax-free Allowance: This will be increased to £11,000 in 2016/17. The higher rate threshold will increase to £43,000. When combined with the new tax-free Dividend Allowance, individuals will be able to receive up to £17,000 before income tax is payable.
  • Pension Annual Allowance: Those earning over £150,000 will have their annual allowance tapered away to £10,000 per year from April 2016.
  • Inheritance tax: There will be a new £175,000 allowance for family homes on top of the existing allowance, when you leave your home to your children or grandchildren.
  • Inheritance tax: The £325,000 threshold will be held until 2020/21. Unsed allowances can be passed on to a spouse. When added to the nil-rate band for family homes, this will increase the IHT threshold for married couples to £1 million.
  • Inheritance Tax Relief: This will be tapered away for estates valued over £2 million.
  • Mortgage Interest Relief: Buy-to-let landlords will have their higher-rate relief tapered out from April 2017 and relief will be restricted to basic rate relief.
  • Rental properties: From April 2016, landlords of furnished properties will only be able to deduct costs actually incurred in maintaining a property. Currently landlords can claim 10% of the rental income to cover wear and tear.
  • Rent-A-Room Relief: This will be increased from April 2016 so that £7,500 can be earned each year tax free.
  • Sunday Trading Law reforms: Local mayors and councils to be given new devolved powers to relax opening hours for larger shops.
  • Non-domiciled residents: From April 2017, those who have lived in the UK for more than 15 of the last 20 years will pay UK tax on all overseas income and gains.
  • Bank Levy: The levy will be tapered out over the next six years and will be replaced by a single 8% surcharge on profits from January 2016.
  • Insurance Premium Tax: From November this year, Insurance Premium Tax will increase to 9.5%.
  • Fuel Duty: Fuel Duty will remain frozen for 2016.
  • Climate Change Levy: The exemption for renewable energy will be abolished from 1 August 2015.
  • Vehicle Excise Duty: From April 2017, all new cars will be subject to a new VED regime. For the first year of ownership, VED will be based on emissions. After that cars, will be liable to one of three duty bands. Existing cars remain unaffected. All income raised through VED will go into a new Roads Fund.
  • MOT tests: New cars will only require an MOT once they are four years old – one year later than current requirements.
  • Apprenticeship Levy:  A new levy will be introduced on large employers. Employers will be able to access the levy to fund up to three million new apprenticeship places.
  • Free childcare: Working parents with children aged three and four will be entitled to 30 hours of free childcare per week from September 2016.
  • New Youth Obligation: From April 2017, those aged between 18 and 21 will be required to be in education or work.

The initial response to the chancellor's Budget was mixed. However, he did manage to pull a rabbit from the red Budget box in the form of the Living Wage, which has pleased many.

Vicki Hughes, founder of Fugu PR and member of the Brighton Living Wage Campaign said: "A living wage should be an essential part of any responsible business and it's something that many SMEs, including my business Fugu, have naturally built into our business models since day one. It’s not just desirable that people are paid enough to live, but should be a number one priority for anyone running a business."

However, others were less enthusiastic about the announcements. Darren Fell, ceo of Crunch Accounting, said: “Overall we thought this was a hit-and-miss Budget for freelancers and micro-business owners. The continuing reductions in corporate and personal taxes can only be seen as a good thing, but the changes in dividend taxation and the new restrictions to the Employment Allowance will negatively impact one-person limited companies. George Osborne is essentially giving with one hand and taking away with the other." 

Elaine Clark of agreed: "I understand that the Government wants to clamp down on artificial or disguised employment but they need to make sure that they do not throw the baby out with the bath water.

"Where a director is the sole employee of a limited company, they will no longer be able to claim the Employment Allowance. It seems that with this, and the reform to dividends, the hard working single director limited company is going to be worse off and that cannot be a good thing."

Brian Palmer, AAT Tax Policy Adviser, said: "Dividend tax reform has been announced. I believe it is an attempt to level the playing field between ordinary employees, and those who take minimal salary, but get dividends. While I have some sympathy in what’s being attempted, I am concerned this measure might stifle entrepreneurship. Another measure which I worry may stall entrepreneurship is that one person companies will no longer be able to claim Employment Allowance."

Commenting on the reforms to Sunday trading, retail expert and high street campaigner Clare Rayner said, "Footfall stats prove the traditional high street opening hours are no good for businesses, and being open early evening and all weekend is in their interest.

"Some smaller shops do open on Sunday, alongside their larger chain-store neighbours, but if the town centres were, in general, seen as more accessible, open for business and therefore more convenient for shoppers it could boost footfall in towns. Those who want to will be able to linger longer without feeling pressured to get their shopping done. And that could be a boost for town centres in general and for all those who trade there."

Summer Budget 2015 small business coverage on the Donuts

July 07, 2015 by Fiona Prior

The Chancellor of the Exchequer, George Osborne, announced the Summer Budget on Wednesday 8 July.

It was the first majority Tory Budget for 19 years and it gave the Chancellor a chance to deliver on some of the Tory party's manifesto promises.

Throughout the week we will be covering the key updates affecting small businesses:

  • We'll be tweeting about the Budget announcements from the @StartUpDonut and @TaxDonut Twitter accounts. Tweet along with us and let us know your response.
  • After the Chancellor's statement, we'll be posting our Budget summary for small businesses on the Tax Donut and in our news section we'll be gauging reaction from small firms and their representatives.

[Updated: 9 July 2015]

Check this page for Summer Budget updates and links to news and comments:

Auto-enrolment: five things employers need to consider when researching pensions providers

June 15, 2015 by Tax Donut contributor

Auto-enrolment: five things employers need to consider when researching pensions providers{{}}As the Government's workplace pension scheme enters its second phase and turns towards firms with 30 or fewer employees, how can employers cut through the pensions jargon to find the right automatic enrolment platform?

Already, five million employees working for large and medium-sized firms have benefitted from this new drive towards filling the £28bn pensions black hole, but what follows over the next two years will be more complex, as an estimated 1.3m small businesses begin to offer retirement-saving schemes.

Lack of understanding

According to The Pensions Regulator, 50% of small firms still don't understand the implications of the new legislation. Small-business owners need to generate new business, understand marketing, finances, supplier issues and staff issues, but most have much less enthusiasm (or time) for understanding the ins and outs of pension schemes.

According to advice from The Pensions Regulator, businesses should allow 12 months to get ready for the workplace pension. Recently published research suggests it takes 103 days to set up a pension scheme, which equates to £15.4bn in lost hours and it would take 450,000 working years to comply. It simply doesn't have to take this long. There are platforms that can do it much quicker.

Five key considerations

So what are the most important things small businesses need to consider when researching a pensions provider or looking to change their existing arrangements? Cost and time are the essence.

  1. Up front set-up fee. These range between free and £1,000. Paying such a fee does not mean you'll get extra support or that it is a more reliable scheme.
  2. Annual maintenance costs for employers. This is often a fixed fee and can be anything up to £1,000 a year for a business.
  3. Set-up time. This can vary from minutes to hours, days and weeks. It largely depends on the efficiency of the system and time taken to authenticate data. Check the small print, because it should be clear how long the sign-up process will take and whether official papers must be submitted, meetings held or if the process can be simply completed online.
  4. Transaction costs. These are more technical costs associated with investing in different stocks and securities. Check this carefully, because some providers charge for this and it can be unpredictable.
  5. Administration costs to employees. This is the annual fee taken from an employee's fund under administration. The Government introduced a fee cap in April, set at 0.75% and some providers charge £18 a year per employee.

Over the next few months, the number of businesses enrolling in a pensions scheme is going to increase dramatically from 10,000 per quarter to about 200,000. This will have a potential time implication, so firms that insist on face-to-face meetings and paper compliance will begin to take much longer. Employers who want to find out their staging date should use this calculator.

  • Copyright © 2015 Andrew Evans, CEO and co-founder of Smart Pension.

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Five tips for employers on managing auto-enrolment

June 01, 2015 by Tax Donut contributor

Five tips for employers on managing auto-enrolment {{}}From June 2015, employers with fewer than 30 staff will begin to be affected by new workplace pension legislation (AKA auto enrolment). It can be difficult to understand your obligations as an employer, but here are five quick tips to help you navigate the process.

1 Start early

Prepare for auto enrolment well ahead of your staging date. Once you receive your letter from The Pensions Regulator, follow the nomination instructions as soon as possible to ensure all further correspondence is being sent to the right person in your business (or those to whom you outsource). This would also be a good time to research the best pension scheme for your company. NEST is a pension scheme set up by the government that any employer can use.

2 Meet your auto enrolment obligations

Not only will your employees be out of pocket on a pension scheme designed for everyone but there are heavy fines handed out from The Pension Regulator the longer you are non-compliant.

3 Get everyone on board

Employers must communicate how the new workplace pension scheme will work to their employers in a certain way and at certain times. The Pensions Regulator has guidelines available.

4 Ensure your payroll information is correct

Contributions to workplace pensions are based on each company's payroll every month. To manage auto enrolment correctly, contributions must match the payroll information and be detailed on payslips issued to employees. It would be a great injustice if you thought you had understood and set up the pension correctly yet the data from payroll resulted in incorrect auto enrolment.

5 Keep an eye on employee categorisation

Employees need to be assessed every month for auto Enrolment, as they may become eligible and must be opted into the chosen pension scheme. Furthermore you'll need to process opt-outs, opt-ins and make employers aware if there are changes to their employees pay or contribution levels.

Copyright © 2105 Beatrice Drewitt, auto enrolment specialist at Quartz Payroll and Auto Enrolment.

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