Tax planning can free up more money to invest in growing your business.
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Plenty of businesses achieve growth by increasing sales. But there are two other ways companies can achieve the same end goal without a single extra customer — and it’s all about maximising profit.
The first is by increasing efficiency, thereby reducing costs. Sometimes this is highly effective but often efficiencies are difficult to achieve without compromising staff morale or quality.
So, what else can be explored?
Another way you can increase profits without looking for shortcuts is by claiming tax reliefs. The three main reliefs your business may be entitled to are Research and Development (R&D) tax credits, Patent Box tax relief or Capital Allowances.
In our ten year history, we have helped 14,000 firms claim back a total of £230 million across all three tax relief areas — a significant sum that has boosted company profits without any extra sales.
Depending on the nature of your company, you may be eligible for all three.
Here, we will explore how each form of tax relief works and how your business could benefit.
R&D tax relief
This was introduced by the UK government in 2000 to reward and encourage innovation among UK businesses.
HMRC kept the definition of R&D as broad as possible so it could apply across multiple industry sectors. It is defined as work that seeks to resolve a ‘scientific or technological uncertainty’ in the form of a new process, product, service or even an improvement to an existing one. The work does not have to be successful to qualify as it is the innovative process that is being rewarded.
This means a huge number of companies are potentially eligible for R&D tax relief – nearly eight in ten according to our research.
But despite this, 55% of them have never made a claim, the same survey showed.
With the average R&D claim worth £54,000 a year, this means millions of SMEs are missing out on a valuable extra revenue stream.
Why are so many firms missing out?
The most common reason is that firms do not realise their work makes them eligible for R&D tax credits, associating it solely with scientists in laboratories.
We recommend any company that has developed a new product, service or process in the last two years seeks professional advice from a tax relief expert as they may well be eligible.
Other common barriers to claiming R&D tax credits are not knowing how to go about claiming and concerns the process will be too costly and time consuming to be worth the effort.
Applying for R&D tax relief is not a simple and easy process — the rules around R&D relief are complex.
The claim is made up of a calculation of qualifying costs, such as the staff costs and materials you use in the course of the R&D. Tax legislation is strict as to what does and doesn't qualify and without help it is easy to get this wrong.
This is why many companies prefer to use a specialist tax consultant to advise them or even make the claim for them.
Most reputable consultants will work on a contingent fee basis so there does not need to be any upfront cost to claiming.
Any company executive who is not sure whether his or her business could qualify for R&D tax relief should seek out professional advice, as there is a good chance they are missing out on tens of thousands of pounds every year.
The Patent Box
The Patent Box tax relief was rolled out from 2013 and rewards income made from patents with a reduced rate of corporation tax of just 10% — nearly halving the rate of corporation tax payable on intellectual property (IP) related income.
More than 50% of firms had never heard of the Patent Box tax relief, our research showed. This means around four in ten businesses with successful patents fail to apply for this valuable tax relief.
On average, more than 5,600 patents were granted every year from 2012 to 2017, according to government figures. By contrast, Patent Box claims over this period peaked at 1,160 in 2015 to 16, with a total value of £754.3 million, meaning there are thousands of eligible companies who have not claimed.
If a company has registered patents, it should immediately investigate how much of its income is generated from this product or service in order to cut its tax bill.
Further, an IP audit should be undertaken, to include full consideration of a company’s R&D activity with focus on whether anything could be patented to enable the company to maximise its Patent Box claim.
All UK taxpayers who own commercial property, personally or through a limited company, may be eligible for capital allowances tax relief.
Capital allowances offset all the hidden expenses associated with that property such as air conditioning, wiring, heating, lighting and security systems against your overall tax bill.
A quarter of companies that own commercial property are not aware they can claim capital allowances, our survey showed. With the average capital allowance claim worth £48,000 per year, these companies are missing out on a major revenue boost.
The eligibility and value of the claim depends on multiple criteria and this is where things get complicated. The tax law on what does and does not qualify is complex and constantly being updated.
Capital allowances come in different forms such as Annual Investment Allowance (AIA) and Writing Down Allowances, all of which work in different ways and have different values.
Even where companies do claim capital allowances, it is very common to under claim as most accountants have no more than a passing knowledge of the subject and often do not carry out a detailed assessment of the company’s eligible assets.
Our research showed business executives underestimated the average value of a Capital Allowances claim by nearly £20,000.
A full on-site survey is only effective when paired with an in-depth understanding of what qualifies under certain categories,
So a specific skillset is needed to accurately assess a commercial property’s cost, and place values on the qualifying plant and machinery, from air conditioning to plumbing.
This is where companies should look to work with accountants who have specialist knowledge in this field or work in partnership with capital allowances experts.
Taken in isolation or together, these key forms of tax relief can significantly boost a company’s annual income, providing extra capital which can be used to fuel further business innovation and growth, so don’t miss out.
Mark Tighe is founder and CEO of tax relief specialist Catax.
Catax is the UK’s leading expert in specialist tax relief. Since launch, it has recovered more than £230m of tax relief for its clients in the areas of Research & Development, Capital Allowances and the Patent Box.