Government Giveaways. Or how to increase the government deficit through good tax planning. Geoff Hill, Tax Manager

Transcription

1 Government Giveaways Or how to increase the government deficit through good tax planning Geoff Hill, Tax Manager

2 Today s topics Research and development tax credits and relief Land Remediation : Tax relief for repairing and remediating land and buildings (occupied or derelict) Capital allowances : Making the best of your spend on the environment, cars, machinery and buildings Share schemes : the Enterprise Management Incentive and a magic tax saving from the government...taking an overview of each due to limited time but happy to discuss detail!

3 A quick reminder... Today is aimed primarily at companies and their tax planning Companies pay corporation tax on their profits, broadly in line with the numbers in their accounts but adjusted for tax reasons (egentertainment, depreciation etc) Most companies pay at 21%-28% (at least at the moment?) The aim of the game is to obtain government money, reduce the tax bill, or at least put it off for a while (fund, mitigate or defer!)...good news for employees, directors and owners

4 Research and development tax relief Ticks all the boxes as it has government funding, reduced tax and deferrals What is R&D all about... Claiming up to 175% of your expenditure as tax relief Government funding of 24.5p in the for loss making companies Capitalising your research cake and still eating it Just for once.. a positive government approach (HMRC like it!) We do lots of these (over 1m in recent months) Government handouts : 6bn a year on R&D

5 Research and development tax relief First step : find out if you are doing research and development... Innovative work involving science Resolving technological uncertainties Competent third party scientist would agree this is R&D Could include prototype work, testing new materials, writing software routines, unsuccessful or blue sky work Can be minor improvement providing involves innovation (egthe formula one car that goes 0.1 of a second faster) Not always obvious that you have R&D (egdeveloping new way of assembling product together in a manufacturing process, say) Keep records!

6 Research and development tax relief Next step : identify qualifying costs Need at least 10k of costs Qualifying salaries and related expenditure (can be apportioned) Third party R&D consultancy, testing etc (often at 65% only) Materials consumed in the process (egparts, software) providing prototypes are not sold to the customer Heat, light and power (if not specifically identifiable can be claimed on ega headcount basis) Watch for grant funding as could break a claim

7 Research and development tax relief Claiming tax relief or a tax credit (Small and Medium Sized Enterprises) Uplift costs by 75%, so 100,000 expenditure becomes 175,000 At 28% tax this 100,000 of costs saves an extra 21,000 of tax for free OR For a loss making company surrender these costs at 24.5p in the 1 (eg 100,000 of costs will generate 24,500 of cash) Note : when claiming credit, claim can t exceed company s general PAYE and NIC bill and company must be going concern Tip : Consider a bonus to Director for R&D efforts?

8 Research and development tax relief Which choice should you make...? Use costs now to save tax if you are paying tax (don t forget you can share these around groups of companies using group loss relief ) Get money from the government as a credit if you are loss making for a while at least (great for start ups and tech development phase companies) Both are good value for money but if you are expecting imminent profits consider keeping the losses as they are worth more as a tax saving All claims are made through Company Tax Return and can usually re-open the last two years to do so

9 Research and development tax relief What if you are not a Small or Medium sized enterprise? Fortunately SME is a generous definition <500 employees AND no more than 86m Euros balance sheet or 100m Euro turnover So probably only an issue if you are owned by a large national company or multinational All is not lost, large enterprise can still claim 130% (rather than 175%) but no payable tax credit

10 Research and development tax relief A neat trick : how about capitalising the costs and still claim? Providing accounting rules let you capitalise the qualifying costs (talk to us!) go ahead Positive impact on the balance sheet and company profits as costs didn t go through the profit and loss Specific enabling legislation means you can STILL make a claim as if it had all been expensed Just make sure all capitalised costs have been carefully reviewed to ensure they qualify for R&D relief generally

11 Research and development tax relief Don t forget about R&D plant and machinery Look for machines dedicated to R&D such as test equipment, computers Claim a 100% capital allowance rather than being forced to claim only 20% per year No credit but a great way to reduce tax This is probably the thing most often forgotten!

12 Research and development tax relief For people experienced with R&D what s new...? Requirement to own IP has been relaxed Qualifying indirect costs claimable going forward...? Time spent by maintenance/support staff in repairing R&D equipment Time spent by R&D staff in training related to the R&D Secretarial and HR time spent supporting the R&D staff (but not time spent supporting those undertaking indirect activities) Finance and payroll activity to the extent it relates to the R&D staff HMRC have recently accepted this area qualifies Consider apportioning indirect costs?

13 Research and development tax relief An example : Company makes profits of 2m and pays tax at 28% Tax bill will be 560k (ouch!) Review and identifies qualifying R&D costs of 500,000 currently within expenses as it has been working jointly with a customer to develop new technology. Discussion with our accounting team confirms that it can capitalise these costs Profits go UP to 2,500,000 and Tax goes DOWN by 105,000 through claim! If that same company had been loss making, we could instead obtain a funding tax credit of 122,500 in cash!

14 Land Remediation Tax Relief Ticks all the boxes as it has government funding, reduced tax and deferrals What is Land Remediation all about... Claiming up to 150% of your expenditure as tax relief Government funding of 24p in for loss making companies Capitalising your expenditure cake and still eating it Rules largely rewritten from 1 April 2009 and specialist advice essential to maximise claims We have made over 500k of claims in the last year

15 Land Remediation Tax Relief Identify your expenditure on contaminated land.. Land or buildings are in a contaminated state if there is contamination present; it is causing relevant harm; or there is a serious possibility that it could cause relevant harm, or it is causing, or there is a serious possibility that it could cause, significant pollution in the groundwater, streams, rivers or coastal waters Providing the contamination didn t arise as a result of the claimant s use!

16 Land Remediation Tax Relief What is contamination? Some examples... Unsafe asbestos in buildings (this is the claim we see most often!) Naturally occurring Arsenic or Radon Infestations of Japanese knotweed (but not weeds in general!) Leaks from old oil tanks or chemicals NOT natural air or water (so NOT drainage works for flood risk) Old agricultural land and chemical/water pollution present as a result Contamination must arise from industrial activity (which includes how the building eg a non industrial office was constructed)

17 Land Remediation Tax Relief What costs qualify? Professional costs and advice to establish clean up process and risk etc Staffing costs, third party labour costs, cost of materials Costs of clean up and removal of harmful aspects Third party haulage etc costs as well as in house costs but NOT landfill tax paid Planning applications will often identify land remediation works needed Must have been incurred to clean up land and not incidental to ega development of the site that was already planned Staff spending over 80% time on works treated as 100%, and less than 20% as not qualifying NOT indirect costs Not costs for contamination caused by current owner

18 Land Remediation Tax Relief Once again, an uplift is available, at 150%. So expenditure of 100,000 is treated as 150,000. At a tax rate of 28% this gives a 14,000 extra tax saving on land remediation works of 100,000 Loss making company can surrender loss at 24p in (so much closer choice to make than with R&D) What choice to make... Whichever gets you money first! Claim is made through tax return with reopening of years as with R&D

19 Land Remediation Tax Relief Just as with R&D, if it can be capitalised and if we do we can STILL claim for it This capitalisation will often be possible in the accounts where work is carried out on a property that has long term benefit (egremoval of asbestos to allow it to be used safely as office space) Can have significant positive impact on balance sheet and profit of company plus a tax saving!

20 Land Remediation Tax Relief Recent changes : Rules now include costs of bringing derelict land back into use Only covers land acquired that has been derelict since 1998 Limited local application but if it applies it isn t just harmful aspects?

21 Land Remediation Tax Relief An example : Company makes profits of 2m and pays tax at 28% Tax bill will be 560k (painful once again!) Review and identifies qualifying land remediation costs of 500,000 currently within expenses as it has been repairing asbestos in the walls and removing a japanese knotweed infestation caused by recent fly tipping. Discussion with accounting team confirms that it can capitalise these costs as improvement to land & buildings Profits go UP to 2,500,000 and Tax goes DOWN by extra 70,000 through claim! If that same company had been loss making, we could instead obtain a funding tax credit of 120,000 in cash!

22 Capital Allowances What s this all about...? Opportunity to reduce or defer tax bill (and maybe to obtain funding for company) Normally companies can only claim 20% allowances per annum on their plant and machinery without special rules Restrictive rules for cars Previously annual allowance of 50,000 where 100% relief can be claimed on plant and machinery

23 Capital Allowances What s new? Annual investment allowance is now 100,000 (at least until 22 June?) so a decent chunk of expenditure can be claimed for full tax relief (but not for cars!) There is a new regime called integral features where a 10% rate can be claimed Cars have been substantially overhauled Environmentally beneficial machinery with special treatment and tax credits

24 Capital Allowances Integral features (new rules) Designed for expenditure on utilities/fabric in buildings where we might previously have been unable to claim anything (or at best 4%) Identify cost of electrical works, mains supplies, drainage in building, air systems, water heating, lifts/elevators and external solar shading New 10% rate applies to these (full relief over a number of years) Where possible use your 100,000 Annual Investment Allowance against it to claim full 100% relief, if not claim the 10% lower rate. Very common and applies to most if not all businesses with buildings! Make claim through tax return (and we can do a specialist review or work with surveyors)

25 Capital Allowances Cars allowances have been significantly rewritten 20% allowances used to be limited to 3,000 per annum List price of 12,000 made a difference and selling the car crystallised the inevitable loss All of these rules have been rewritten (just before their 50 th birthday) and the 3,000 rule has gone... Now, no limit to 20% allowances if car has under 160 g/km2 co2 emissions Limited to 10% allowances if car has over 160g emissions More consistent allowances, especially with lower emission vehicles Cars are not treated separately, so selling them won t crystallise a loss as proceeds are swallowed up within other plant and machinery changes So think carefully when you choose a company car what emissions it should have as 160g is a threshold that halves the rate of tax relief!

26 Capital Allowances Very Low emission cars can be claimed at 100% as if they were a full expense in the year Very Low = 110g/km (but no doubt this will keep going down in future) Not as bad as it sounds as there are versions of VW Golfs, Mini Coopers, Audi A3 and many others with emissions this low Also includes most Hybrids and all electric cars Must be a car purchased from new 100% tax relief even though it will be on the balance sheet as an asset Think carefully when selecting a new vehicle, especially for your employees as a company car Example : Buying a 20,000 car with very high emissions saves tax in year one of only 560. A very low emission vehicle will save tax of 5,600 in year one!

27 Environmentally beneficial machinery 100% tax relief, or a tax credit on qualifying expenditure Applies to all assets that are on the list on eca.gov.uk but ONLY assets on the list Look out for that ECA logo on invoices and supplier advertising Good for the environment = good for a tax saving, so make sure you ask your suppliers about... Air-to-air energy recovery Water leakage detection Efficient toilets and taps Rainwater harvesting equipment Automatic monitoring/targeting (AMT) Water meters Boiler equipment Combined heat and power (CHP) Compact heat exchangers Compressed air equipment Heat pumps for space heating Heating ventilation and air conditioning equipment Lighting Water Flow Controllers Refrigeration equipment Uninterruptible Power Supplies (UPS) Solar thermal systems Pipework insulation Radiant and Warm Air Heaters Motors and drives

28 Environmentally beneficial machinery Qualifying assets have a 100% tax relief available on cost in year of purchase Or alternatively a tax credit if loss making (just like for R&D and Land Remediation) Credit is 19p in (limited to company s PAYE/NIC bill and 250,000 if greater) Example : A company spends 20,000 on air conditioning equipment. Without special rules, tax relief in year one is 560. With a qualifying environmentally beneficial piece of equipment, tax relief is 5,600. If loss making a payable tax credit of 3,800 could be claimed. Make claims through company tax return

29 Share schemes the Enterprise Management Incentive What is this all about? A great way to incentivise staff Attractive tax treatment for participators in scheme Fully approved and encouraged by government Available for companies with < 250 employees and gross assets under 30m Quick overview today as quite a few wrinkles in how to implement a share scheme Magic tax deduction for the company to pay for scheme Now available for internationally based companies following improvements to scheme These are very popular with our clients and we can package this up for a company But...we do need to see what 22 June brings us

30 Share schemes the Enterprise Management Incentive In a nutshell, the scheme allows employees to share in company growth in a very tax efficient way Options a piece of paper issued to selected employees entitling them to buy up to 120,000 of shares at today smarket value at some time in the next 10 years Targets are set before they can buy shares (egmust grow department sales, company must have 50% more turnover, 3 years must have passed etc) If targets are met, individual can choose to go ahead and acquire shares at the value set at the offset (which by then will hopefully be a good thing!) Individual now owns shares and can potentially get dividends etc and will receive a share of sale proceeds if the company is ever sold, liquidated or floated

31 Share schemes the Enterprise Management Incentive Benefits for employer... Ties in key staff Can set targets around objectives for departments Entirely discretionary as to who and how much Tax saving for company when employees acquire shares Option to create shares for scheme that ONLY participate in future growth of business to ensure founder or current owners do not share existing wealth Allows company to compete with very large corporates

32 Share schemes the Enterprise Management Incentive Benefits for employee.. Feels valued and part of business Growth in shares between grant of option and acquiring shares is not taxable when they buy shares When they do sell shares the entirety of the growth is at capital gains tax rates rather than income tax and national insurance This could be still beneficial after 22 June but we will have to wait and see! Opportunity to participate in floats, sales, management buy outs

33 Share schemes the Enterprise Management Incentive Example : Mrs Valuable Director is given an option to buy shares in the company that are currently worth 30,000 for 30,000. To do this she must grow her department sales by 25% within 3 years and at that time the company must also have an overall profit of at least 500k After 3 years she acquires her shares for 30,000. At this point the shares are worth 60,000 due to company performance and growth. She pays no tax at this point! When she does sell all growth will be capital gains treatment, currently at 10-18% (after 22 June?) The company gets a magic tax deduction of 8,400 even though it has not spent any money other that set up costs for the scheme

34 WG Outsourcing Finance function Finance Director services Marketing Human resources IT resources

35 Any questions...?..and thank you (if you have been) for listening! Geoff Hill Tax Manager Geoff.Hill@wardgoodman.co.uk