Time to renew your Tax Credits

Many small business owners are on low incomes whilst they build up their business and often they can claim Working Tax Credits.

The following summary is from Citizens Advice

Who can get Working Tax Credit

The number of hours a week you have to work to be able to get Working Tax Credit depends on your circumstances.

If you’re single or in a couple, and have no children, you can qualify if:

you are 25 or over and you work at least 30 hours a week, or

you are 16 or over and you work at least 16 hours a week and you are disabled and you get a qualifying benefit, or

you are 60 or over and you work at least 16 hours a week.

If you’re single and have at least one child, you can qualify if:

you are 16 or over and you work at least 16 hours a week and you are responsible for a child or young person.

If you’re in a couple and you are responsible for a child or young person, you can qualify if:

you are 16 or over and you or your partner works at least 16 hours a week and the two of you work at least 24 hours a week between you in total. For example, you can meet this condition if you work 16 hours a week and your partner works 8 hours a week. If only one of you works, that person must work at least 24 hours, or

you are 16 or over and you work at least 16 hours a week and you are disabled and you get a qualifying benefit

you are 16 or over and you work at least 16 hours a week and your partner is a hospital in-patient or entitled to Carer’s Allowance or in prison or gets certain disability benefits

you are 60 or over and work at least 16 hours a week.

There is an online questionnaire you can use to find out if you might qualify for WTC. Go to the GOV.UK website at www.gov.uk.

What counts as work

Your work can be:

for someone else, as a worker or employee
for yourself, ie self-employment
a mixture of the two

If you’re self-employed

Some self-employed people are not eligible for Working Tax Credit. To qualify, your self-employed work must aim to make a profit. It must also be commercial, regular and organised.

If you’re claiming tax credits, you’ll be sent a renewal pack. It will tell you how to renew your tax credits.

You must renew your tax credits by 31 July 2016 if your renewal pack has a red line across the first page and it says ‘reply now’.

steve@bicknells.net

Why aren’t you claiming R&D Tax Credits?

R&D Relief is a Corporation Tax relief that may reduce your company or organisation’s tax bill.

Alternatively, if your company or organisation is small or medium-sized, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HM Revenue and Customs (HMRC)

But your company or organisation can only claim R&D Relief if it’s liable for Corporation Tax.

The Small and Medium-sized Enterprise Scheme

This scheme has higher rates of relief. Since 1 April 2015, the tax relief on allowable R&D costs is 230% – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £130 on top of the £100 spent. It also includes a payable credit in some circumstances.

The Large Company Scheme

If your company isn’t small or medium-sized, then you can only claim under the Large Company Scheme.

Since 1 April 2008, the tax relief on allowable R&D costs is 130% – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £30 on top of the £100 spent. If instead there’s an allowable trading loss for the period, this can be increased by 30% of the qualifying R&D costs – £30 for each £100 spent. This loss can be carried forwards or back in the normal way.

Government Statistics show a steady growth in claims

Construction Examples of R&D

The investigation into the removal of contamination from sites, including land remediation
Advancements in structural techniques that aid construction relating to unusual ground conditions
The innovative use of green or sustainable methods and technology
Development or adaptation of tools to improve efficiency
The use of new or unique materials, e.g. recycled products
Improvement on existing construction methods or development of new ideas to solve ongoing issues related to the site environment or project specifications
Innovative architectural design

IT Systems Examples of R&D

The design, construction and testing of systems, devices or processes e.g. new hardware or software components, digital interface and control systems
Integration of legacy and new systems e.g. following a corporate merger or acquisition, the adoption of an Enterprise Architecture or externally with partners in joint ventures
Advances in network management and operational tools, development of wired or wireless technologies, designing mobile and interactive services, evolution of new generation network switching and control systems
Data intensive activities e.g. the collection, storage and analysis, distribution and retrieval. Defining or working with new or emerging data models and metadata standards, integration with third party content

These examples and more are shown on the Cost Care Website

There are also examples by Industry on the Alma CG website

http://www.taxdonut.co.uk/sites/default/files/RD-Tax-Credits-Infographic.jpg

http://www.taxdonut.co.uk/blog/2014/12/beginners-guide-claiming-rd-tax-credits-infographic

These are the key questions that you will be asked when requesting an R&D Tax Credit from HMRC:

How was it decided that R&D had taken place
A description of the scientific & technological advance sought
The uncertainties involved
How and when the uncertainties were resolved
Why the knowledge being sought was not readily deducible by a competent professional
Were any grants, subsidies or contributions received for the project within the claim
Who owns the Intellectual Property of the products resulting from the R&D
Was the R&D carried out for others ie clients, this could mean your claim is rejected

This HMRC Spreadsheet will help you calculate your Claim

steve@bicknells.net

How much tax will you pay on your dividends?

The current dividend tax credit system is a bit confusing and works as follows

You want to pay a dividend of £900. Divide £900 by 9, which gives you a dividend tax credit of £100. Pay £900 to the shareholder – but add the £100 tax credit and record a total of £1,000 on the dividend voucher. The dividend is then shown gross on the tax return and then the 10% tax credit is deducted rates of tax are then applied as noted below.

Dividend tax rates before April 2016

Tax band	Effective dividend tax rate
Basic rate (20%) (and non-taxpayers)	0%
Higher rate (40%)	25%
Additional rate (45%)	30.56%

This will change from April 2016, see the table below

Dividend tax rates after April 2016

Tax band	Effective dividend tax rate
Tax Free £5,000	0%
Basic Rate Tax Payers (20%)	7.5%
Higher Rate Tax Payers (40%)	32.5%
Additional Rate Tax Payers (45%)	38.1%

But be warned!

While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.

These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 2019‑20. The tax system will continue to encourage entrepreneurship and investment, including through lower rates of Corporation Tax. (HM Treasury Summer Budget 2015)

steve@bicknells.net

7 situations where you might be able to claim tax credits…

You could claim Working Tax Credit if:

you’re aged 16 or over
you work a certain number of hours a week
you get paid for the work you do (or expect to)
your income is below a certain level

Here is a summary of how much you could claim:

Element	Amount
You’re a couple applying together	Up to £1,990 a year
You’re a single parent	Up to £1,990 a year
You work at least 30 hours week	Up to £800 a year
You have a disability	Up to £2,935 a year
You have a severe disability	Up to £1,255 a year (on top of the disability payment)
You pay for approved childcare	Up to £122.50 (1 child) or £210 (2 or more children) a week

Reasons why you might be able to claim or find it difficult to claim:

5 million claims are made each year, have you checked you eligibility with the https://www.gov.uk/tax-credits-calculator
Often small business owners have low incomes, particularly when the business is in the start up phase meaning they may be able to claim
If you live in another EEA country but you are still liable to pay (and actually pay) UK National Insurance contributions (for instance you live in Republic of Ireland but work in Northern Ireland) you may still be able to claim
If you (or your partner) go abroad for up to eight weeks at a time, HMRC will treat you as if you are still in the UK, providing you intend your visit abroad to be temporary. Temporary means you expect it to last less than 52 weeks.
Couples find it complicated – Members of a couple must make a joint claim with their partner. Although this may appear a fairly straightforward and sensible requirement, it is one of the more complicated and problematic parts of the tax credits system. Ask your accountant for help.
Crown Servants are exempt from the absence rules
One area of particular difficulty in determining whether to make a single or joint claim is where one partner is in the UK and the other is not. The interaction with various EU law rules makes this a difficult area.

steve@bicknells.net

10 tax allowances we fail to claim

In 2012 Unbiased.co.uk reported that £12.6 billion was unclaimed by UK tax payers, here is a list with some ideas:

Income Related Tax Credits – Check and find out what you are entitled to – UK Benefits https://www.gov.uk/benefits-adviser
Tax Relief on Pension Contributions – There are estimated to be over 4 million people not paying into a pension, auto enrolment should help to change that, this blogs explains the tax advantages http://stevejbicknell.com/2012/05/02/why-invest-in-a-pension-because-of-tax-relief/
Tax Relief on Charity Donations – Are you using Gift Aid? are you a higher rate tax payer entitled to additional relief?
Saving on Inheritance Tax – Many people don’t have a Will let alone any IHT planning!
Making Use of ISA’s – Why get taxed on the interest on your savings if you could have an ISA? Its easy to get an ISA and you can still have access to your ISA savings if you need it, the current ISA allowance is £11,520 or £5,760 for cash ISA’s
Child Benefit – Use the benefits adviser to check if you can claim – UK Benefits https://www.gov.uk/benefits-adviser
Avoiding tax penalties and late filing – This just requires you to be organised, make sure you know the filing dates http://www.hmrc.gov.uk/sa/deadlines-penalties.htm and get the information needed in plenty of time
Savings on Capital Gains – The current allowance for 2013/14 is £10,900 (previously £10,600) for an individual many people seem to forget they have this allowance
Making Use of Employee Share Schemes – The government love employees to have shares and this year introduced a new share ownership option http://stevejbicknell.com/2013/08/03/employee-shareholders-will-your-employees-want-shares/
Income Tax and Personal Allowances – Consider who should own assets (and get income from those investments) – you or your spouse – so that you can minimise your tax liability

Steve@bicknells.net

Have you renewed your tax credits?

You need to renew if you receive an Annual Declaration form (TC603D or TC603D2) with an Annual Review notice (TC603R).

You don’t need to renew if you only receive an Annual Review notice (TC603R), as your claim will be renewed automatically. However you still need to tell the Tax Credit Office straightaway if:

you have had any changes in circumstances
your income is different to what’s shown in the Annual Review notice
there are mistakes or details missing from the notice

If you’ve been sent an Annual Declaration (TC603D or TC603D2) and don’t renew, the following will happen:

your payments will stop
you will have to pay back any overpayment from the previous tax year
you will also have to pay back any payments you’ve received from the start of the new tax year
you’ll get a statement from the Tax Credit Office about your tax credits payments
you will usually have to make a new tax credits claim if you don’t provide the information within 30 days

The HMRC calculator will help you understand whether you are entitled to tax credits and how much you could claim http://taxcredits.hmrc.gov.uk/Qualify/DIQHousehold.aspx

I know that many small business owners claim tax credits because in the early years of the business their income is low.

So don’t forget to renew by 31st July.

steve@bicknells.net

Things you need to know about R&D Tax Credits…..

Research and Development (R&D) tax relief (or credit) is a company tax relief that can either reduce a company’s tax bill or, for some small or medium sized (SME) companies, provide a cash sum. It is based on the company’s expenditure on R&D.

For there to be R&D for the purpose of the tax relief, a company must be carrying on a project that seeks an advance in science or technology. It is necessary to be able to state what the intended advance is, and to show how, through the resolution of scientific or technological uncertainty, the project seeks to achieve this.

http://www.hmrc.gov.uk/manuals/cirdmanual/cird80150.htm

These are the key questions that you will be asked when requesting an R&D Tax Credit from HMRC:

How was it decided that R&D had taken place
A description of the scientific & technological advance sought
The uncertainties involved
How and when the uncertainties were resolved
Why the knowledge being sought was not readily deducible by a competent professional
Were any grants, subsidies or contributions received for the project within the claim
Who owns the Intellectual Property of the products resulting from the R&D
Was the R&D carried out for others ie clients, this could mean your claim is rejected

Amount of relief

For expenditure incurred up to and including 31 July 2008 SMEs can deduct 150% in respect of their qualifying R&D expenditure and the payable tax credit can amount to £24 for every £100 of actual R&D expenditure. For expenditure incurred on or after 1 August 2008 SMEs can deduct 175% in respect of their qualifying R&D expenditure and the payable tax credit can amount to £24.50 for every £100 of actual R&D expenditure. The rate is further increased from 1 April 2011 to 200%, and a payable credit of £25 for every £100 of spend.

Large companies can deduct 125% in respect of qualifying expenditure incurred up to and including 31 March 2008 and can deduct 130% thereafter.

Here is a template (originally created by HMRC but updated by me) to help you calculate the value of your claim it has references to relevant HMRC guidance.

The claim is made on your corporation tax return (CT600) if you discover that you should have made a claim in a prior year its not too late, follow this link to find out how to correct prior year returns http://www.hmrc.gov.uk/ct/managing/company-tax-return/amend.htm

Case Studies and Examples

Here are some excellent examples http://www.bis.gov.uk/files/file36112.pdf

It is possible to claim for software http://www.bis.gov.uk/files/file34845.pdf

Software could be tool to enable the R&D or a goal in its own right, but simply modifying existing software isn’t R&D. It has to follow the same rules as other R&D and be an advance in science and technology.

Construction companies have claimed R&D for developing new building systems and new building technologies.

R&D could be a new process rather than an invention.

It doesn’t have to have a patent but there could be advantages to having one, such as patent box tax relief.

steve@bicknells.net

Are you eligible for Tax Credits?

There are two types of Tax Credit and there is also Child Benefit:

Child Tax Credits

You could get Child Tax Credit for each child you’re responsible for if they’re:

under 16
under 20 and in approved education or training

You don’t need to be working to claim Child Tax Credit.

https://www.gov.uk/child-tax-credit

Child Benefit Changes

The current rate of child benefit is £20.30 a week for the oldest child and £13.40 a week for each subsequent child. The payments are made every four weeks into one parent’s bank account.

From Monday 7 January 2013, any household in which someone earns more than £50,000 will no longer be entitled to the full payment. Households which include someone earning more than £60,000 will not be entitled to any child benefit at all.

However, rather than just paying parents less the government will continue to pay the full amount and claw back overpayments through the tax system and a new High Income Child Benefit Charge – unless you opt not to receive the payments.

http://www.guardian.co.uk/money/2013/jan/03/child-benefit-changes-what-they-mean

Working Tax Credits

Working tax credits are less easy to understand and often overlooked. They are awarded on a points system.

A working family with 2 Children could earn up to £58k and still get Working Family Tax Credits, on £30k they would get £12k in tax credits, at £40k its £8k and £50k its £4k (according to Tax Cafe – Small Business Tax Saving Tactics).

Claims are initially based on your previous years income and can only be backed a month.

Follow this link to find out how much you could be entitled to https://www.gov.uk/working-tax-credit/overview

The benefits system will be changing again with the introduction of Universal Credits in October 2013.

steve@bicknells.net

Things you need to know about Dividends…..

It can be illegal to pay dividends if:

1. There are insufficient retained profits to cover the dividend payments

2. Dividend payments may be illegal if the relevant paperwork has not been completed

Board Minutes – which must be kept for 10 years http://www.companieshouse.gov.uk/about/gbhtml/gp3.shtml#ch4
Dividend Vouchers

You can download free templates from

http://www.contractorcalculator.co.uk/declaring_dividends_paperwork.aspx

HMRC are increasingly contending dividends and arguing that they are in reality earnings under the s62 ITEPA 2003 (salary sacrifice) rules and to persuade them otherwise needs proof that a set procedure for the declaration of dividends has been followed.

An example of a board minute is as follows:

Minutes of a meeting of directors of bloggs limited Held at 14 the road, london, ir3 5nl On 31 march 2005

Present: J Bloggs – Director

It was resolved that the company pay a dividend of £9,000 per £1 ordinary share on 31 March 2005 to the shareholders registered on 31 March 2005.

……………………………………
J Bloggs – Director

http://www.ir35calc.co.uk/dividend_documentation.aspx

Companies pay you dividends out of profits on which they have already paid – or are due to pay – tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their ‘dividend income’.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your ‘dividend income’.

The dividend you are paid represents 90 per cent of your ‘dividend income’. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the ‘dividend income’.

Dividend tax rates 2011-12

Dividend income in relation to the basic rate or higher rate tax bands	Tax rate applied after deduction of Personal Allowance and any Blind Person’s Allowance
Dividend income at or below the £35,000 basic rate tax limit	10%
Dividend income at or below the £150,000 higher rate tax limit	32.5%
Dividend income above the higher rate tax limit	42.5%

So the 10% tax credit offsets the 10% basic rate tax

Dividends are not subject to National Insurance.

Can you claim the tax credit if you don’t normally pay tax?

No. You can’t claim the 10 per cent tax credit, even if your taxable income is less than your Personal Allowance and you don’t pay tax. This is because Income Tax hasn’t been deducted from the dividend paid to you – you have simply been given a 10 per cent credit against any Income Tax due.

http://www.hmrc.gov.uk/taxon/uk.htm#5

Declaring dividend income on your Self Assessment tax return

If you normally complete a tax return you’ll need to show the dividend income on it. See income boxes 3 and 4 http://www.hmrc.gov.uk/forms/sa100.pdf

If you don’’t complete a tax return, but you have higher rate of tax to pay on your dividend income, you should contact HMRC.

Hope this is helpful

steve@bicknells.net

Bicknell Business Advisers Limited

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