Several important changes are happening to research and development (R&D) tax reliefs in April 2023, which could affect what income qualifies for R&D tax relief that businesses need to account for in their plans.

These new measures are still being considered by Parliament, but details of the upcoming amendments to the R&D tax relief system have now been published.

Overseas outsourced R&D

Under the new rules, the costs of overseas workers will not qualify for UK R&D relief, where costs are incurred after April 2023.

The Government has indicated that it does not want to introduce a rule that discriminates against businesses that cannot practically carry out research in the UK.

The Government will, therefore, legislate so that expenditure on overseas R&D activities can still qualify where there are:

• Material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research – for example, deep-ocean research
• Regulatory or other legal requirements that activities must take place outside of the UK – for example, clinical trials

The Government also needs to consider the international structures and connections of businesses carrying out R&D.

If a blanket ban was imposed, UK groups with overseas subsidiaries conducting work on a UK project may not be able to make a claim, despite the innovation still benefiting the main UK parent company.

Cloud computing and data 

Businesses have been unable to claim for the costs of cloud computing and data use. This has hampered some of the UK’s most innovative tech companies by excluding them from the tax benefits of the R&D credit scheme.

Under the Bill, businesses will be able to include the costs of purchasing data for R&D projects or using cloud computing services.

However, HM Revenue & Customs (HMRC) is still expected to provide clarity on the issues of usage and residual values in its upcoming guidance.

Amongst the other issues to consider is identifying cloud costs that relate to an R&D project. Many businesses use the same cloud services throughout their operations, so apportioning specific costs to R&D may be challenging.

Other qualifying costs for cloud computing costs may also be an issue, as it has been revealed that the costs of ‘data storage’ will not be allowed. Again, further clarity on what these rules cover should be provided in HMRC’s guidance later this year.

Anti-abuse action

There has been growing concern that the R&D tax relief system is open to abuse and so the new measures will include compliance procedures to deter speculative or fraudulent claims. This will include:

• An entirely digital claims system
• Additional details to be submitted with all claims
• Requirements for a named senior officer of the company to endorse each claim
• Companies made to notify HMRC, in advance, of their intentions to submit a claim
• Details of any agent who has advised the company on compiling the claim.

HMRC will also be given new powers and enforcement action to tackle R&D tax advisers. It is thought that alongside these measures, HMRC will invest further resources into conducting additional risk profiling and scrutiny of R&D tax relief claims.

Additional reforms 

During his Spring Statement, the Chancellor alluded to the fact that he planned to introduce further changes to the R&D tax relief system in future to improve access to the support that it offers.

Within the Statement’s accompanying documents, the Treasury says that the steps it hopes to take could support an additional £5 billion of R&D funding by 2024.

One of these steps has already been revealed with the expansion and clarification of qualifying expenditure to include pure mathematics services.

Further details about reforms to the R&D tax credit system are expected later in the year, nearer to the Autumn Budget.

The Government has said that, Where required, legislation will be published in draft before being included in a future Finance Bill to come into effect in April 2023.

Links: R&D tax relief is changing – here’s what you need to know

HM Revenue & Customs (HMRC) is to launch a new mandatory P87 form from 7 May to create a consistent standard for the P87s it receives.

What is a P87 form?

Workers and their agents can use a P87 form to claim tax relief on work expenses. The form can only be used to claim tax rebates for an employee, not if you are self-employed as this is done via the Self-Assessment system.

Taxpayers need to submit a separate P87 for each job they are claiming a tax refund for.

What is changing?

At the moment claims for income tax relief on employment expenses can be made using:

• a self-assessment tax return
• online service available to taxpayers (but not agents)
• print, complete and post the P87 form available on GOV.UK
• by phone (subject to limits) if a claim has been made for a previous tax year
• substitute claim form or letter. Substitute claim forms are widely used by high volume repayment agents.

From 7 May 2022 claims for income tax relief on employment expenses can only be made on the standard P87 form, which can be found on GOV.UK.

HMRC will reject claims that are made on substitute claim forms, but the other options above will remain available.

Although this measure is due to be introduced later this year, the new P87 form is now live here.

Links: HMRC to mandate the format of claims for employment expenses

Businesses across the UK are already benefitting from the temporary tax relief offered by the super-deduction but many more could still be missing out on this vital support.

The super-deduction scheme was introduced on 1 April 2021 and will run until 31 March 2023. It allows firms investing in qualifying plant and machinery assets to benefit from a 130 per cent first-year capital allowance.

This allows companies to cut their tax bill by up to 25p for every £1 they invest. Most companies also benefit from a 50 per cent first-year allowance for qualifying special rate (including long life) assets.

Thanks to the super-deduction, companies will be able to claim allowances of 130 per cent on most new plant and machinery investments that ordinarily qualify for main rate writing down allowances, such as:

• Compressors
• Computer equipment and servers
• Electric vehicle charge points
• Foundry equipment
• Ladders, drills, cranes
• Office chairs and desks
• Refrigeration units
• Solar panels
• Tractors, lorries and vans.

Businesses can claim a first-year allowance of 50 per cent on most new plant and machinery investments that ordinarily qualify for special rate writing down allowances. Special rate investments include:

• Parts of a building considered integral – known as ‘integral features’
• Items with a long life
• Thermal insulation of buildings.

To benefit from the relief, the assets purchased must be new and not second hand or refurbished equipment.

The relief is also only available to incorporated companies, but unincorporated businesses, such as partnerships and sole traders, can continue to benefit from the Annual Investment Allowance (AIA) which permits a deduction of 100 per cent for qualifying plant or machinery expenditure up to the threshold of £1 million until March 2023.

Here is an example provided by HM Revenue & Customs (HMRC) on how the super-deduction works:

• A company incurring £1 million of qualifying expenditure decides to claim the super-deduction
• Spending £1 million on qualifying investments will mean the company can deduct £1.3 million (130 per cent of the initial investment) when computing its taxable profits
• Deducting £1.3 million from taxable profits will save the company up to 19 per cent of that – or £247,000, which is 19 per cent of £1.3 million – on its Corporation Tax bill.

The AIA remains available alongside the super-deduction for incorporated businesses as well, so businesses must review how they use these schemes together to maximise the tax relief available.

Link: Super-deduction

While the national job vacancy boom is good news for job seekers, it could be a nightmare for businesses keen on retaining high-quality staff.

While a pay rise is always welcome it may not always be the most tax or National Insurance efficient approach when compared with other benefits, including salary sacrifice, that could be as effective in persuading key employees to stay put.

Salary sacrifice enables employees to exchange part of their salary for a non-cash benefit from their employer, such as increased pension contributions, mobile phones and bus passes or even funding a new car.

Other examples of common salary sacrifice benefits include:

• Childcare vouchers
• Cycle to work scheme
• Car hire/lease scheme
• On-site nurseries
• Car parking
• Gym membership
• Pre-paid store cards
• Personal learning.

For each salary sacrifice arrangement, both parties must agree on what the cash value of the benefits on offer is worth to ensure the benefit fairly compensates the employee for their loss of income.

Sacrifice arrangements tend to remain in place for at least 12 months unless the employee experiences a lifestyle change.

Effect on tax and National Insurance contributions

The impact on tax and National Insurance contributions payable for any employee will depend on the pay and non-cash benefits that make up the salary sacrifice arrangement.

You need to pay and deduct the right amount of tax and National Insurance contributions for the cash and benefits you provide. For the cash component, this means operating the PAYE system correctly through your payroll.

Calculate a non-cash benefit

For any non-cash benefits, you need to work out the value of the benefit by using the higher of the:

• Amount of the salary given up
• Earnings charged under the normal benefit in kind rules.

For cars with CO2 emissions of no more than 75g/km, you should always use the earnings charge under the normal benefit in kind rules.

The only benefits you do not need to value and do not have to report to HMRC for a salary sacrifice arrangement are:

• Payments into pension schemes
• Employer-provided pensions advice
• Workplace nurseries
• Childcare vouchers and directly contracted employer-provided childcare that started on or before 4 October 2018
• Bicycles and cycling safety equipment (including cycle to work)

How to set up a salary sacrifice scheme

As an employer, you can set up a salary sacrifice arrangement by changing the terms of your employee’s employment contract. Your employee needs to agree to this change.

A salary sacrifice must not reduce earnings below National Minimum Wage rates.

As the UK braces for a rise in National Insurance rates, many professionals see the use of salary sacrifice arrangements as a way of potentially reducing contributions – especially the provision of an electric company car. For expert advice on salary sacrifice, seek professional advice.

Link: Salary Sacrifice

A cash flow statement provides data about all cash inflows a company receives from its operations and investments.

It tells you how much cash is entering and leaving your business in any given period.

Along with balance sheets and income statements, it is vital for managing your small business accounting and making sure you have enough cash to keep operating.

These important statements deliver accuracy because they track the cash made by the business in three main ways – through operations, investment, and financing.

It is a key part of understanding your business’s financial health, so much so that it was listed as third in the Financial Reporting Council’s (FRC) list of most frequently raised areas in their 2020–21 Corporate Reporting Review.

Transparency and integrity

The FRC, which regulates auditors, accountants and actuaries, and promotes transparency and integrity in business, found cash flow statements with items incorrectly classified.

It said in its Annual Review of Corporate Reporting for 2020/21: “We continue to be concerned about the number of queries we raise in relation to compliance with the requirements of IAS 7 ‘Statement of Cash Flows’.

“As in prior years, many of the cash flow statement errors described in sections 3.1.3 and 6.3 were identified through critically analysing the line items appearing on the face of the statement. Companies should increase their focus on cash flow statements as part of their pre-issuance reviews.”

To avoid errors, and to emphasise the importance of people taking personal responsibility for the stewardship of cash flow, sufficient time and resources should be allocated to prepare and review them.

Business leaders should take responsibility for cash management if there is a risk of business failure and avoid errors when reporting, certain guidelines should be followed, such as:

• Regular communication with those in charge of cash movements
• Strict controls over cash flow reporting
• Making sure responsibilities, reporting lines and staff cover for all cash-related matters are clearly understood
• Enhancing forecasting effectiveness to get a clearer idea of cash flow in real-time
• Preparing easy to understand cash flow reports to support critical business decisions and funding
• Increasing frequency of reporting
• Preserving underlying data in as much detail as possible.

The principles outlined should apply to all sizes or types of business. Cash flow is the lifeblood of any business and the monitoring and maintenance of it should not be underestimated.

Link: Cash flow statements – avoid common pitfalls

The cloud is king in the world of accounting, with a vast range of software and applications available, designed to be easy to use by businesses and their owners.

The beauty of cloud accounting is that the software can be accessed anywhere that has an internet connection on a range of devices.

Good accounting software can be critical for business leaders. It makes it easier to get a handle on company data and understand how the company is performing at any time.

This empowers you to work with your accountant to make effective decisions quickly and confidently.

Here are some areas where you can do more with accounts software:

Controlling budgets

Planning and controlling spending are key areas for business success, especially at this moment in time. Successfully implemented software can help your business grow by allowing you to allocate your budget to the areas of your business that make you the most money.

Once you have allocated budgets, your teams can record spending in the latest accounts software so you can always see if you are on track or overspending in less profitable areas.

Multi-user access

Using traditional accounting software can be expensive, difficult and time-consuming to upgrade. In comparison, most cloud accounting platforms update automatically for free and under most licenses, giving you multi-user access, without the need to install expensive software on multiple computers and devices.

Multi-user access makes it easy to collaborate online with your team and advisors and allows your accountant to access your data in real-time to provide insights that help your business thrive and grow or warn you of potential risks on the horizon.

Staff access to the software and security

You may not want everyone to see everything, which is why you can grant different levels of access to different people within your organisation.

The cloud is one of the most secure ways to store information thanks to the sophisticated encryption used by many platforms’ servers.

This means that no one can access your data unless they have a login to the online account and permission to view the information saved there.

There is an app for that

The growth of platforms has been outpaced by the incredible number of connected apps that support the main functions of cloud accounting by helping with analysis and automation.

There really is almost an app for everything when it comes to cloud accounting. These provide you the tools to achieve incredible things.

Although much of the focus in recent years has been on the essential role of cloud accounting in compliance with Making Tax Digital, more and more businesses are learning about the great benefits on offer beyond this.

Link: Eight tips to make the most of your accounting software

Thousands of taxpayers benefited from the Self-Employment Income Support Scheme (SEISS) as the pandemic raged over the last two years, before its closure last year.

The scheme, which involved five grant payments, was set up by the Government to provide support for the self-employed, for example sole traders, provided certain eligibility criteria were met.

However, there are many pitfalls facing taxpayers as HM Revenue & Customs (HMRC) claws the money back and it appears many individuals may have misunderstood the rules.

Payment difference

You must tell HMRC if you received more than they said you were entitled to.

The tax office expects you to report this without further prompting.

Accountants in the dark

Many accountants may not have the full details of SEISS grants claimed by individuals and cannot, therefore, advise self-employed workers on the tax implications this year.

This is because the grants had to be claimed through an individual’s personal Government Gateway, which accountants were locked out of to speed up the payments to those in dire need.

Taxpayers should immediately make their accountants aware of the situation if they have claimed so that it can be incorporated into tax calculations and during reporting.

Claims not showing on the tax return

The first three grants were paid before 6 April 2021, so they should have been declared on the taxpayer’s 2020/21 tax return.

HMRC created new boxes on the return forms to report grants and so the self-employed needed to be particularly careful to include the SEISS grants in the box relating to the self-employed grants, not the box for ‘any other income’ or ‘support payments such as CJRS’.

Incorrect declaration on tax return

If the total value of SEISS grants declared on the 2020/21 tax return did not match SEISS grants one to three, which HMRC believes it paid out to that taxpayer, it has confirmed that it will automatically correct the Self-Assessment calculation.

When you receive or assess your tax bill it is important to check in case HMRC has corrected or included a grant.

The tax authority has said some individuals’ tax identities may have been misused to submit a fraudulent claim.

Payments on account

The system assumes the taxpayer will receive at least the same amount of taxable income in 2021/22 as in 2020/21. But the SEISS grants received in 2021/22 are likely to be lower as a maximum of £15,000 could be received in that year compared to a cap of £21,570 in 2020/21.

As a taxpayer, you can apply to reduce the payments on account for 2021/22 through the personal tax account online service or a paper form SA303.

It is important to note that the SEISS grant should not generally be included in the turnover of the business for the period.

Making payment into the wrong account

You can also tell HMRC if you want to voluntarily pay back some or all of the grants you received. You can do this at any time.

The SEISS repayment has to be made to a specific HMRC bank account set up for the purpose and be accompanied by the grant claim reference. The taxpayer should not repay the grant into their Self-Assessment tax account.

For help and advice on SEISS taxation, you should speak to an accountant at the earliest opportunity.

Link: SEISS – A dangerous legacy

Taxpayers are being reminded that COVID-19 support grants or payments should be declared on company tax returns as they are taxable.

HM Revenue & Customs (HMRC) has issued a reminder that the filing deadline for company tax returns (CT600) is 12 months after the end of the accounting period it covers.

The deadline to pay Corporation Tax will depend on any taxable profits and when the end of the accounting period occurs.

HMRC says that Coronavirus Job Retention Scheme (CJRS) grants, Eat Out to Help Out (EOHO) payments, or any other support payments made by local authorities or Government, must also be reported as income when calculating taxable profits.

Company tax return

If you received a CJRS grant or an EOHO payment, you will need to do both of the following:

• Include it as income when calculating your taxable profits in line with the relevant accounting standards
• Report it separately on your Company Tax Return using the CJRS and EOHO boxes.

You should record all other taxable COVID-19 payments as income when you calculate your taxable profits.

If you have already filed a return and have not declared your Coronavirus support grants or payment as taxable income, you will need to submit an amended return.

CJRS grants or EOHO payments must be reported separately in the boxes provided on the CT600 corporate tax return. These boxes were added on 6 April 2021.

It is important to update third-party software by downloading the latest version to be able to complete the relevant boxes in the company tax return.

Taxable grants include:

• Test and trace or self-isolation payments in England, Scotland and Wales
• Coronavirus Statutory Sick Pay Rebate
• Coronavirus Business Support Grants (also known as local authority grants or business rate grants).

When furloughed employees were paid through real-time information (RTI), the employer was responsible for making the usual PAYE, National Insurance contributions (NIC) and automatic enrolment deductions.

Employers must treat the grant as taxable income for Corporation/Income Tax purposes but can deduct employment costs as normal when calculating their taxable profits.

Link: Covid grants must be reported on company tax returns