Whether you're someone working in the nuclear industry on a self-employed basis or you’re employed as a financial director, you will no doubt be continuously considering how you can add value to your business through tax efficiencies and applicable tax reliefs.
Whilst many of the enquiries we get from our clients in the nuclear industry are also applicable to most other industries, we do find a lot of interest around the following topics:
Taking each one in turn, let’s now consider how you could be adding more value to your business.
Science and technology businesses in the nuclear industry are often thriving with innovation, which commonly includes some research & development (R&D) work and associated costs.
Science and technology based companies may be able to claim 225% of R&D costs against taxable profit. This can even lead to a company receiving cash back from HM Revenue & Customs (HMRC) if the claim creates or enhances a tax loss. From 1 April 2012 this cash back is no longer subject to a cap. The minimum spend of £10,000 was also abolished with effect from 1 April 2012.
There are two schemes, the SME Scheme and the Large Company Scheme. They are very similar in most respects with the major exception being the rate of enhanced relief. The SME Scheme provides a 125% enhanced relief, i.e. for every £1 qualifying spend the taxable profit is decreased by or tax loss increased by a further £1.25. For the Large Scheme, the enhanced relief is 30%, although this is being phased out in favour of an “above the line” tax credit system which can give rise to a repayable credit to loss making companies. This will be of benefit to SME companies claiming under the large scheme due to the receipt of state aid grant funding.
You can't claim R&D relief under the SME Scheme if you are a subcontractor - that is, if you have been subcontracted to do the work on behalf of somebody else. But, even if your company is small or medium-sized, you may still be able to claim, as a subcontractor, under the Large Company Scheme.
We have found that many companies are missing out on claims for various reasons. Some of the most common of these include:
As part of the government’s corporation tax reform to encourage investment and growth in the UK economy they have introduced a new relief from corporation tax entitled the ‘Patent Box’. The Patent Box applies to companies generating profit from patented products and processes and broadly speaking, it will be a reduced corporation tax rate for income generated from patents.
The Patent Box is a new relief from corporate tax that entitles any company subject to UK corporation tax to only pay tax at 10% on the net income received from patents and similar intellectual property (IP). Tax will be payable at this rate only as long as the company is actively involved in the exploitation of the patent and will be applicable to both new and existing IP. The full benefits of the Patent Box are being phased in over five years, starting on 1 April 2013.
Rather than a simple 10% rate, there will be an ‘effective’ 10% achieved by applying a calculation to reduce profits to a level where they are effectively 10%.The government forecasts that the relief will generate tax savings of £500 million in 2013-14, £800 million in 2014-15 and £900 million in 2015-16, and hopes that this will incentivise science and technology companies to locate in the UK, essentially jump starting the economy in this area by providing significant tax savings.
There are restrictions in place for this attractive relief so care must be taken. A variety of incomes will attract the lower rates of tax including income from the sale of patents, infringement income, income from sales of products with patents and patent royalties.
Companies need to act now to ensure their accounting records are suitable to capture the relevant information. Companies with patents pending also need to be aware of the new rules as the relief is aggregated and given in the year the patent is granted, therefore requiring the information to be gathered whilst the patent application is being processed.
We are often approached by individuals who have been asked to set up a company to supply their services to a contractor in the nuclear industry. HM Revenue & Customs refers to such arrangements as “personal service companies” (PSCs). Whilst this is not a problem in most cases, care needs to be taken with respect to the intermediaries’ legislation that was introduced to eliminate avoidance of tax and national insurance through the use of such companies. The legislation is known as “IR35”.
The House of Lords is currently investigating the use of PSCs for tax collection and has set up a select committee to do so. It will be looking at the extent to which PSCs are in use, including the issue of whether some individuals are forced into the use of a PSC as a prerequisite for being considered for work. The review will also consider the effectiveness and efficiency of the intermediaries’ legislation which was first introduced in 2000. The select committee says it aims to report to the House, with recommendations and conclusions, in March 2014.
Typically this is more of an issue where you are only supplying your services to one company and evidence suggests it’s more of an employment relationship. That aside, even if you are happy your contract, there are plenty of other things to consider when operating your business through a company.
Are you extracting profits in the most tax efficient manner? Typically owner managed businesses will take a small salary and the rest of available profits through dividends. This is usually the most efficient method but it needs to be considered in the context of your other income and personal circumstances.
If there are other shareholders in the company you will also need to consider the control and rights their shares give them. It is possible to vary and pay dividends to others independently to the dividends you pay yourself, but care needs to be taken to ensure this is done in accordance with the company’s articles of association. With careful planning significant tax savings can be made.
A lot of businesses will have income in excess of the VAT registration threshold (currently £79,000) and so will do a compulsory VAT registration. However, it is quite common for businesses to register for VAT voluntarily. For example, if you are a consultant under the VAT registration threshold, but your customers are mostly VAT registered, you could do a voluntary VAT registration under the Flat Rate Scheme. This means you charge an additional 20% on your invoices for the VAT, but the amount you pay to HMRC may only be 12% or 14% (the flat rate) on your VAT inclusive turnover. You therefore benefit from the net difference. You wont claim VAT back on your expenses (unless capital items over £2,000), but as a consultant you aren’t likely to have many standard rated costs. Businesses with turnover up to £150,000 can apply and can stay in until turnover reaches £230,000.
The nuclear industry also sees a lot of activity by way of joint ventures (JVs). A JV is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. JVs can take the form of jointly controlled operations, jointly controlled assets, or jointly controlled entities. Typically a JV will be formed to pool the resources of the individual venturers when bidding for a contract.
The detailed financial reporting and taxation issues surrounding JVs are outside the scope of this article but it is worth highlighting just a few of the more important factors:
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