How healthy is your tax position?
29 June 2023
With inflation running high, new tax legislation, and HMRC’s change in enquiry focus, the phrase ‘cash is king’ is more important than ever. The BDO team take a look at three of the key areas that companies in the Food & Drink sector need to be up to speed with in order to maintain a healthy tax position.
Research & Development relief
Whether you are an SME or a large business the rule changes, which came in from 1 April 2023 and others coming in from 1 April 2024, mean that there is a lot to learn to keep up to speed on your R&D claims:
- The good news is that, for companies claiming under the large company R&D Expenditure Credit *(RDEC) scheme, the rate of relief increases from 13% to 20%. So, despite the increase in the Corporation Tax rate, the post-tax benefit to companies will increase from 10.5% to 15%.
- However, for SME claimants there will be a reduction in both the cost enhancement percentage and tax credit rates: the benefit for a loss-making company will decrease from 33.4% to 18.6% and for a profit-making company from 24.7% to 21.5%. There was some better news where a loss-making business has qualifying R&D expenditure of more than 40% of their total annual costs: such companies will be able to claim a repayable credit of 27% of their costs. Unfortunately, this still leaves claimants in a worse off position than before, some more so than others.
- The consultation on merging the two current R&D schemes closed recently. This is due to come into effect from 1 April 2024, and the reduction in the differences in net benefit between the SME and RDEC seems is a significant step towards this.
- There are also a raft of other changes that need careful consideration as they could affect the value of your future R&D claims:
- Overseas workers – in an effort to focus on UK R&D activities, the exclusion of expenditure associated with overseas workers and subcontractor will mean R&D activity will need to physically be located in the UK in order to qualify for relief (with some limited exceptions). So, for Food & Drink companies that utilise overseas research resources or work on developments with overseas manufacturers, you may need to consider if restructuring of your R&D activities is needed to remain cost effective. This restriction is now due to come into force 1 April 2024, a welcome delay from the originally announced date 1 April 2023.
- Additional administration – with an extension to the level of detail needed to support claims through the mandatory ‘Additional Information Form’, pre-notification, sign-off by a named officer at the company and details of the advisor that assisted with the claim required, the new R&D claim process is looking to be much more complicated. But if you don’t get it right HMRC could simply strike the claim out of your tax return. In the spring Budget, it was announced that this will now need to be completed for all claims submitted after 1 August 2023, regardless of a company’s accounting period.
- Cloud computing and pure mathematics – for businesses that utilise cloud computing services as a subscription, a welcome change is that these can be qualifying costs for the first time from 1 April 2023, along with ‘pure’ mathematics costs (previously only costs related to applied mathematics have been claimable).
Transfer Pricing
New Transfer Pricing regulations came into effect from 1 April 2023. Companies with a consolidated Group revenue threshold of more than €750m, for the relevant period, will now be legally required to maintain both a ‘Master File’ and a ‘Local Country File’.
It can be complicated to understand a company’s obligations and prepare these files, especially for a company that is owned by a much larger entity, but operate as a small UK business. Getting ahead on what the requirements will be should be high on a company’s agenda.
Fortunately, the original proposal to require a Summary Audit Trail to be compiled as well has been delayed until further consultation is completed - although it is expected that more documentation will be needed in future years.
However, it’s not all bad news as getting robust Transfer Pricing documentation in place can also help a business by ensuring that only the correct profits are taxed in the appropriate companies. Additionally, we have seen HMRC scrutinise a company’s Transfer Pricing with respect to its R&D claims – so it will be important to ensure pricing policies accurately reflect how a company works with the wider group.
Capital Allowances
The capital allowances changes are good news for manufacturers investing to remain efficient:
- While the removal of the Super Deduction from 1 April 2023 had been a concern for manufacturers, the move to ‘full expensing’ with a 100% first year allowance will actually give businesses marginally more tax relief: 25% at the new corporate tax rate compared to 24.7% under the super deduction. It should be remembered that this does not apply to long life assets or integral features so only a 50% allowance can be claimed once the business has exceeded its £1m Annual Investment Allowance for a year.
- Companies should not overlook the potential for claiming R&D Allowances, there may still be specific group circumstances where it is the most beneficial option: it is always sensible to seek expert advice on claiming relief in the most beneficial way.
For help and advice on R&D relief claims, or Corporation Tax changes, and how these will potentially impact your business, please contact our team: Claire McGuigan or Lorraine Nelson.