At this present time, any cashflow advantages are welcomed when it is likely to be difficult for many companies. Whilst you may not have considered any of the below opportunities previously, we encourage you to understand them now in order to strengthen your balance sheet and bring your business more resilience.
Carry Back Corporation Tax Losses
Relief for corporation tax losses your company has made in a year can provide it with a refund of corporation tax. The outbreak of Coronavirus has presented companies with a unique set of challenges. Chief among them, how to manage cash flow.
Where your company has been adversely affected by the pandemic, it could well be faced with a tax loss making position.
In this case, it can offset the current year’s tax loss against the profits of the previous year. It can reclaim the associated corporation tax that was paid. Moreover, the liability may not have been paid for the current year. In which case, it should be possible to reduce the amount payable to HMRC.
So, this is how claiming tax losses works:
- In the year to 31st March 2019, your company has taxable profits of £24,000. It has paid tax of £4,800 in December 2019. However, in the year to 31st March 2020 your company made a tax loss of £22,000.
- So what do you do to claim the tax losses?
- The tax return for the year to 31st March 2019 is amended to show taxable profits of £2,000 and once it is filed, there will be a refund of tax of £4,400.
HMRC are currently keen to make these refunds swiftly, since they wish to be seen to be helping all businesses during these strange times.
Likewise, if your company has made a capital gain in the previous year, the tax loss for the current year can be offset against this gain too. It is not restricted to trading profits.
On this point, the company must have carried out the same trade in both years. So, your company continues to supply electrical components in both years, then it is acceptable that you can offset these losses. However, in the second year if you decide to supply garden furniture too, any losses incurred in this new trade cannot be carried back. It is only those relating to electrical components.
There are some other caveats to claiming tax losses and some of these are as follows:
- It may be in your interests to shorten your accounting period. If so, and the period is for nine months then only nine months of the previous year’s profits can be used to relieve the tax losses of the following. So, for both longer or shorter periods there must be an apportionment, a loss is only carried back 12 months.
- Any claim must be made within two years of the end of the accounting period the loss was made in.
What if I have not paid my tax for the previous year and I have a tax loss in the current year?
Where the corporation tax return for the current tax loss making period has not yet been submitted, there is no formal method allowing companies to make an early claim to carry back loss relief.
If your company wishes to make an early claim, they will need to approach HMRC and obtain clearance for that to be allowed. The tax return for the earlier profit is amended. The submission to HMRC requesting the early carry back of losses will need sufficient evidence that losses will be included in the company tax return for the loss-making period when it is eventually submitted. Providing an acceptable form of evidence is therefore critical to the timely success of a repayment.
Research and Development Tax Credits
In these unprecedented times, businesses need to focus on managing their cashflow more than ever before, and a successful R&D claim can often unlock a valuable tax refund in return for a relatively low investment of time.
Generally speaking, a business that is developing new products or substantially improving existing products and processes can qualify for the relief. For a loss-making business, every £100 of qualifying expenditure could potentially generate up to £33 of cash for the company and over the last few months we are seeing that HMRC have sped up the repayment process.
R&D claims can be made across a wide range of sectors, from software start-ups to food manufacturers, the construction and automotive sectors and many, many more. Some examples of qualifying activities where we have made successful claims for our clients include:
New product development:
- A manufacturing company who undertook a project to design and develop bespoke parts for a completely new rocket engine propulsion unit.
- An ink manufacturer undertook a project to improve upon an existing ink formulation to enable the ink to stick to plastic surfaces where previously there had been problems with the ink wearing off over time.
- A food manufacturer who streamlined a five-stage heating and cooling process into a three-stage process, whilst still maintaining the same high standards of food safety and organoleptic qualities for the consumer.
- A software coding company undertook a project to convert their customer’s current paper based system to a computer based bespoke system that incorporated a CRM sales tool, a stock management system and a production system, bringing together multiple different datasets and writing new code to integrate those systems.
Qualifying costs for R&D purposes include staffing costs, externally provided workers, software and consumable materials.
A proportion of light, heat and water rates can also be claimed but other fixed costs such as rent, telephone and business rates cannot be claimed.
The SME R&D relief scheme is a form of State Aid, which means that where other forms of state aid have been received (for example grant funding or, potentially a CBILS loan which was taken out for the purposes of undertaking a R&D project) then these projects will not qualify under the SME R&D relief scheme.
The research and development expenditure credit (RDEC) is not however considered state aid and therefore if any of the project expenditure is not covered by the grant/CBIL a claim can be made for RDEC instead.
Specialist tax advice is vital in identifying and capturing relevant R&D activities/costs and maximising the potential benefits to clients. Accountants are best placed to take a holistic view of the business and are able to look at the interaction between the R&D claim and other tax planning tools, such as remuneration planning or tax loss planning, to ensure that the business (and its development activities) are structured as tax efficiently as possible.
Companies who undertake qualifying R&D will often (but not always) go on to seek IP protection for their products and processes. Accountants should also consider the availability of Patent Box as a Corporation Tax reducer where the company meets the relevant conditions.
Using your Property to obtain Tax Reliefs
The current lockdown means many commercial properties stand empty or have fewer people using them. However, whether you’re a landlord, tenant or you own your trading premises, your building can still work for you and save you money and, in many cases, can even generate a tax refund to help with that all important cash flow, which could be vital to your business’ survival. Never has it been more important to make sure you are claiming all the relief to which you are entitled.
Structures and Buildings Allowances (SBA)
Until very recently, no tax relief was available on the bricks and mortar of a building, following the demise of industrial/agricultural buildings allowances almost 10 years ago. However, Finance Act 2019 introduced a new SBA which gives a flat rate deduction against profits at 2% per annum of the cost of any extension or new build built or acquired on or after 29 October 2018, until fully relieved. This deduction was increased to 3% in Budget 2020.
Capital Allowances (CA)
Whilst the SBA is not to be sniffed at, of far more help to businesses is the ability to claim CA on fixtures and fittings installed in the building itself. CAs give relief against trading profits and help reduce your tax bill. Fixtures and fittings for these purposes are fittings attached to the property so that they form part of the property itself, such as heating systems, lighting and electrical systems, lifts, air conditioning, sanitary ware, fitted units and kitchens and alarm systems.
With the increase of the annual investment allowance (AIA), which gives tax relief for CAs of up to £1 million on qualifying capital costs incurred by 31 December 2020, this can mean businesses may get full tax relief on their fixtures in the year they buy a property, which means a lower tax bill or, in many cases, a tax refund.
CA tax relief is generous and a number of measures were introduced in 2012 to prevent abuse. Extra care needs to be taken when buying second-hand property to ensure you, as the new owner, are able to claim; some claims will be restricted, depending on who owned the property before you. It is therefore vital when buying or selling property that you take expert capital allowance advice, to make sure you don’t miss out on valuable reliefs, and that you are maximising your potential to claim.
Not only could there be a potential claim available if you brought your property recently, but it may also be possible to claim on a building you have owned for a while. In either case, it is usually necessary to undertake due diligence to establish your entitlement to claim, as well as a tax valuation survey being undertaken. This relief is on commercial properties only and is available to landlords, owners and tenants, depending on who paid for the fittings. Residential property owners cannot benefit.
Finally, if you are replacing part of your property, such as its roof, windows or kitchen fittings, it may be possible to write such costs off as normal revenue costs, taking relief in the year you carry out the work, provided the works are not capital improvements, such as replacing a poor quality kitchen with marble worktops and bespoke units.
Lockdown Limited bought new trading premises for £1.5 million from a charity that had owned the property since 1995, in its year ended 31 December. As the charity was unable to claim CAs, Lockdown’s claim will be based on the value of the fittings as a proportion of its purchase price of £1.5 million. A tax survey is carried out and it’s established that the fittings have a value of £525K. This is fully covered by the AIA, meaning a tax saving of £99,750 could be made.
No SBAs can be claimed as the property is not new.
Lockdown’s tax bill for 31 December 2019 is £60K before the claim and so this will be fully extinguished, leaving a loss to carry back to 2018, creating a tax refund of £39,750.
EIS and SEIS
EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) are both powerful tools intended to provide incentives for entrepreneurs and investors to invest in growing companies. Investors benefit from targeted tax reliefs and companies can access the much-needed funding required to progress their business. Investors in SEIS and EIS can benefit from income tax, capital gains tax and inheritance tax reliefs on qualifying investments.
The schemes are largely similar but there are some key differences. These types of investment are not targeted by HMRC as avoidance, they are actively encouraged. That said they do need to be operated correctly and scheme conditions must be met throughout. Care is needed in companies where both SEIS and EIS are intended to apply.
EIS Tax Reliefs
Income tax relief is given via a tax reducer of 30%. For each £100 invested by an investor the individual’s income tax liability will be reduced by £30. The maximum amount of relief that can be given in one year is £300,000 with a maximum investment of £1,000,000. Relief can also be carried back to the previous year.
Capital gains tax relief is given in 2 ways:-
- Investor can defer capital gains tax liabilities by making EIS investments and
- As long as the EIS shares are held for a qualifying period any gain will not be subject to capital gains tax.
- Inheritance tax charge can be reduced to £nil if the EIS shares are held for 2 years and benefit from Business Property Relief.
- Loss relief is also available if EIS shares are sold at a loss. Ordinarily a loss on sale of shares is a capital loss and only available to be utilised against capital gains. If EIS shares are sold at a loss, then the loss can be utilised against income instead of capital gains.
SEIS Tax Reliefs
- Income tax relief is given in a similar way to EIS, but the relief is at a rate of 50% of the amount invested. This is subject to a limit on investment of £100,000. SEIS offers a higher rate of relief as SEIS is mainly for smaller companies (assets less than £200,000 before a share issue) in the first 2 years of their trading cycle. The higher risk profile gives the investor a higher rate of return.
- Capital gains tax relief is more attractive as gains are made exempt by the relief instead of just being deferred.
- Inheritance tax and loss relief are both similar to EIS.
There are numerous conditions for both the investor and companies in which an investment is made in order to qualify for these reliefs. These qualifying conditions must be met for the relevant qualifying holding period.
HMRC has an advance assurance process in place which companies can utilise, and this advance assurance can assist in incentivising potential investors, in advance of any investment being made.
Incentivising Key Staff
With cash flows likely to be tight businesses may want to be able to incentivise and reward staff in less traditional ways such as share awards or share option schemes.
Any gift of value to an employee, including the deemed value of shares, will be taxed as employment income and subject to Income Tax and possible National Insurance charges on the recipient.
Post Covid -19 the outlook for many businesses much surely look less steady than a few months ago. It may therefore be the ideal opportunity to bring key employees on board as stakeholders by issuing shares whilst the value of the business could be in a position to be argued lower.
The benefits to the business is that they will be able to tie key employees into the long term future of the business, with employees who now have a vested interest in the business succeeding.
Steps to consider:
- Putting together a robust valuation of the business in readiness of any HMRC challenge
- What rights will be on the shares?
- Is there an NIC charge?
- Does the value need to be reported via the payroll or via a tax return?
- Robust shareholders agreement to protect the business from ‘bad leavers’
- Reporting to HMRC (Via form 42)
Share schemes – specifically EMI
An alternative to giving employees immediate equity would be to put a share option scheme in place. This will mean the employees is granted an option to buy shares, at a specific price, at a specific point in the future.
Whilst business values could be argued to be lower now, a business could get the value agreed by HMRC when setting up an EMI scheme and once the terms of the option are met the employee could acquire their shares with no Income Tax charges.
EMI schemes are very flexible and almost any sets of conditions can be put in place for the options to be exercised. Quite often the options only exercise on the sale of a business but an interesting condition could now be “your options could be exercised once the business returns to its pre covid-19 state”. I.E ‘work hard with us to help us get back to where we were and you will be brought on board as a shareholder’.
The benefit to the employee is that they will now have a vested interest in helping the business recover and as this is an HMRC backed scheme, any tax charges will be to Capital Gains Tax on an eventual disposal (subject to options being granted at market value).
Steps to consider:
- Does the business and the employees meet the conditions for an EMI scheme?
- What conditions to be put in place for an exercise?
- What shares are the options over? What rights will these shares have?
- Getting a valuation agreed with HMRC (required to complete the EMI registration)
- Getting a solicitor to put together the legal paperwork (the actual options)
- Make sure the EMI scheme is notified to HMRC in time – Strict 92 days to let HMRC know about the scheme or risk losing the tax benefits.