The dust has now settled on the recent Budget announcements, Praveen Gupta discusses key tax planning for both your business and personal affairs, to ensure you are maximising your tax efficiency.
Research and Development
In addition to a commitment of additional funds to ease the administrative burden of claiming R&D tax relief and making it more accessible to businesses, the Government announced a change that will impact large businesses, and those SMEs which receive grant funding; as from 1 January 2018, the rate of Research & Development expenditure credit will increase from its existing rate of 11% to 12%.
Surprisingly though, given the Government’s comments about SMEs being the engine room of the UK economy, there were no changes announced around the R&D tax relief for SME businesses. This does continue to be a very valuable form of tax relief, even though that value will be somewhat reduced with the rate of corporation tax reductions that are taking place over the next couple of years.
There also continues to be a misconception in the SME market around the businesses that are able to make a claim for R&D tax relief. According to a HMRC report, more than 30% of all R&D claims originate from companies working outside of what are construed as the ‘usual’ R&D-eligible sectors, with industries as diverse as retail, construction, packaging and software all taking advantage of the tax relief. In fact, the definition of Research & Development is so wide and the activities that can be considered under the scheme so varied, it is very difficult to spot an opportunity and determine eligibility to make an R&D claim purely based on a business’ sector. Our team of R&D experts has supported many businesses in making successful claims and if you would like more information, please get in touch.
Income tax planning
The Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) both remain useful tax planning tools for high net worth individuals to maximise tax efficiencies. In certain cases, these tax breaks can provide significant tax savings to clients and are often used as part of a wider tax mitigation strategy. These reliefs have been made even more attractive by the changes which will come into effect on 6 April next year, when the annual allowance for those investing in knowledge-intensive companies will be increased from £1million to £2million and the amount of tax-advantaged investments an eligible company can receive increased to £10million a year, providing greater opportunity for investors. Following the Patient Capital Review, there were concerns that the EIS and VCT schemes would face major restrictions, however, the changes that were announced are mostly positive and should help these innovative companies grow.
As part of the Government’s plans to improve air quality, two measures were announced to incentivise the use of electric cars.
First, there will be no benefit in kind charge if employers provide employees with workplace electric charging points for electric or hybrid vehicles. This will apply from April 2018 and is piece of the Government’s more extensive plans to invest in an electric charging infrastructure to support the transition to zero emission cars.
The second measure is a rise in the diesel supplement used in company car and car fuel benefit calculations. This supplement will increase from 3% to 4% from April 2018 for cars which do not meet certain standards. The charge will not impact on diesel vans and the diesel supplement does not apply to hybrid cars.
Employers may want to use these changes as an opportunity to consider the type of vehicles they offer to employees.
IR 35 reviews and employee work status
As anticipated, the Government announced that there will be consultation on reforming the off-payroll working rules (more commonly referred to as IR35) for those contractors operating in the private sector.
This follows on from the changes introduced in April this year for engagements in the public sector whereby the decision about a contractor’s employment status, together with the liability for operating tax on the contractor’s fees, moved to the public sector body.
The Government stated that “public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company.”
The consultation document is expected to be published in early 2018. Those individuals who are currently contracting in the private sector, via their own personal service companies, should be watching this area with interest.
The Government has also announced that it will be publishing a discussion paper to “explore the case and options for longer-term reform to make the employment status tests for both employment rights and tax clearer.” This is a complex area and is recognised as such by the Government which has vowed to “work with stakeholders to ensure that any potential changes are considered carefully.”
For more information on any of the issues raised in this update or you would like to talk to us about we can help you plan for tax efficiency, please contact our tax team.