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Mr Taxman… send me a dream…

Posted on: 11 Dec, 18

Dear Mr Taxman, I have been a good boy and would really really like something nice for Christmas.

Oury… tell me something good. It’s Christmas… I’m Brexited up to the eye balls. Even my dog bark sounds like Brexit now… I can’t eat Break-fast, I can’t stand Lexus cars… and next year looks like a list of annoying things… tax return to do in January, the winter banging on still in February… oh good, it’s March it must be time for… ergh… BREXIT…

Clark says...
Oury says...

Forget Brexit my fine feathered finickity fiduciary. Life is to be lived, and work is to be done. Dress the halls with bells and holly, have a Hells lager and get a jolly brolly!

Did all of that yesterday… I’m hung over with a bell in my head, broke the brolly, and fell in a holly bush and have a thorn in my side... I need something else. Give me some good news about doing business in the UK, about how we are not such a lost, backward looking, divided, unattractive small chilly land mass of mediocre souls. The Taxman keeps taking… the clock keeps ticking…. Every chancel is stuck on destruction… what good news is there for me, for businesses, for Britain?

Clark says...
Oury says...

Ok… well… would it help if I told you that the UK has one of the best, and most generous set of schemes for creativity and research and development?

A bit. It would help a lot more if you would just tell me that Brexit was cancelled and it was going to snow this Christmas, but go on then… I’m all .. well mostly all.... elf ears.

Clark says...
Oury says...

Well while it may seem to most that the tax man seems to tax the hell out of everyone, VAT, Income tax, corporate tax, inheritance tax on that tax.. especially if low and behold, you are successful… while letting these big companies and billionaires pay nothing… that is sadly not HMRC’s fault, but a question of world politics. What may surprise you to know is we have one of the most generous and flexible systems in the world for Research and Development tax relief.

I knew it…..up the garden path past the sign of happiness and at the end it says “tax relief”… It’s an oxymoron… take something bad and make it less bad… that’s not a good thing… that’s a neutral thing… that’s like saying “cash debt” … have cash and owe us money…. Can’t they just give us money, just hand it out for once… you know like they did in Australia a few years back and just said - "aww bugger this barbie mate.. let’s have a bloody little bail out for the Barrys and Sheilas?"

Clark says...
Oury says...
  1. The Australian thing was a crap political plan of unfocused spending, which caused more buying of cheap goods from china …
  2. Yes that’s exactly what R&D relief is… well… close enough. The government will give you cash back on your research and development expenditure… wherever it is conducted in the world provided it’s for the UK company trade.

Cash. Like real cash?

Clark says...
Oury says...

Well bank transfer, but yes... cash.

On R&D work conducted anywhere in the world? What even if I have a R&D team up a mountain in Timbuktu?

Clark says...
Oury says...

Timbuktu is a small village on a river in Africa... so no mountains. But yes.

Okay, not bad... and what is R&D and what ridiculous hoops do I need to jump through?

Clark says...
Oury says...

R&D begins when you find a problem and a competent professional in his field (of the problem) thinks this would require an advance in science or technology to solve

Sorry you lost me there, I was doing something more interesting (wrapping presents).. What did you say?

Clark says...
Oury says...

Basically, you have a technical problem in something you are trying to do which is commercial in nature for the business. You are knowledgeable in the area of the problem (not the world’s expert, yet to publish a book, but hell, you know your stuff and you work in this area)... and you think to yourself... I don't know how to solve this. Therefore R&D begins. And it either ends because you fail to solve the problem, or because you create something new that does.

Ok, I can see that. But just because I don't know how to solve it, I bet other people like my competitors do. What about them?

Clark says...
Oury says...

Doesn't count, it must be within the public domain for you to be able to solve it without R&D from generally accepted knowledge. A key point is before R&D begins, you should look around and check that a solution isn't in the public domain already.

Got it, seems a bit weird though... I can do something new, even though lots of other companies might be doing it for donkeys?

Clark says...
Oury says...

It's probably important to know where the R&D for Science or Technology rules come from. Originally it was just ‘Science’. Where knowledge, and the state of the art is a public thing. Scientist publish papers, peers rip them to shreds and occasionally cry, and then write replies and new papers. But it's all out there. What happened is they added ‘Technology’ to these rules as well as Science. However technology isn’t a science per say, and isn't something that is public... Apple are definitely not publicly publishing all their IP while Samsung take it laughing their Korean arses off. But do note, Human Sciences don’t count.

Why not?

Clark says...
Oury says...

Because if you count human sciences you suddenly are able to count every piece of marketing that has ever been done. There is so much the sales and the marketing dept could apply to R&D if you allow the study of the behaviour of humans.

Okay... fair enough. So if I don’t know....

Clark says...
Oury says...

And you know what you are talking about... and it's science (but not human sciences) or technology... then probably R&D begins at that point, to solve the problem. R&D ahoy.... and you make a good point - uncertainty needs to be present. A competent professional says... I don't know if this can even be done.

Then what?

Clark says...
Oury says...

Then - R&D is happening. Now you merely need to write up exactly what this issue is/was and then match this with your costs, which are quite specific. They are namely

  • DIRECT STAFF - Full salaried costs proportioned to the time spent on the problem
  • INDIRECT - The time of those managing the R&D team
  • EXTERNAL - External consultants or subcontractors, anywhere in the world.
  • CONSUMABLES - Anything “used up” in the process

Used up?

Clark says...
Oury says...

You can claim anything that was used up during the R&D.. so power, pencils, test tubes, materials you used and didn't have any of them left at the end...But not your rent, or your servers… you will have a building at the end of it, and the server.

Alright, and direct VS indirect?

Clark says...
Oury says...

Means managers' versus development staff. So if you had a company you ran with 20 employees, half of these dedicated to R&D... and you managed everyone... you could claim half your time. The same goes for R&D staff in terms of you apportion their time to the different R&D projects. Ideally by time sheets, but otherwise by going through their diaries and workflow and working out how long they have been working on particular problems.

Nice... okay that already sounds a pain. Now what do I need to do, and what do I get?

Clark says...
Oury says...

Decide if you want the cash back (if you are loss making) in exchange for your loss... or whether you just want to claim an enhanced loss...

Eh?

Clark says...
Oury says...

So if your company has made a loss of say £1m for the year, and part of why you made this loss is you spent £500k on R&D.

You can claim this R&D element and either now call that loss £1,650k.

Or you can only make a loss of £500k and surrender the part that is R&D and instead get cash of £ 165,000.

Bank transfer!

Clark says...
Oury says...

Okay bank transfer - £166,750 would be the size of it in this example... broadly 33% of your R&D costs of £500k you identified. Note this is the small company scheme. I'm skipping telling you about the RDEC scheme for large companies (100million Euros Turnover Worldwide, 86million Euros Gross Assets, 500 People.) It's pretty similar but you get a lot less money.

Bonza.. Really?

Clark says...
Oury says...

You put one, or perhaps two numbers in your corporation tax return that you do anyway, and send them a copy of this with your report. Within 28 days you will get either the money or be told they want to ask more questions.

Okay not bad - so if I did it now would I get it in time for Christmas?

Clark says...
Oury says...

Eh? watch out for year ends after 1st April 2020 as the cashback element will be capped to 3 x your contributions as a company to tax and national insurance from your workforce, but there is more good news...

Okay hit me, I'm also jibbering with happiness from this mind blowing tax news...

Clark says...
Oury says...

Well you should be, and you should be less cynical, it's Christmas..

You’re absolutely right, tax has been nothing but a positive part of my life…

Clark says...
Oury says...

Clark... well, the better news is that you have 2 years to make a claim... so that means if your year end says 31st December, you have till this 31st December to claim for the years ending 31/12/2016, and 31/12/2017. There are also companies that will lend you next year’s money btw - specialist lenders.

Right, okay, yeah not bad...

Clark says...
Oury says...

It's actually an incredibly generous scheme. It’s a grant scheme operated through the tax system, and you really should be positive about it. It's very attractive to companies internationally who choose to put more IP in the UK and employ more workers in the UK. Many countries have a scheme, but few are as good. Australia might be more generous but the process is very onerous. Spain sounds good but never actually pay out the cash... just by way of example. Businesses that are heavily involved in R&D (and it can be quite surprising examples such as farmers or architects) can reduce their cost of development, therefore reduce the amount they need to raise, and therefore reduce the amount of equity they need to give away. Front and centre of your planning when capital raising is the potential positive impact for R&D. Start-ups that are struggling to compete with cheaper overseas rivals can lower the cost of the development team. R&D should be front and centre of your planning when capital raising is the potential positive impact for R&D, or looking at your employment costs internationally.

Do lawyers do any R&D then?

Clark says...
Oury says...

Well no, but it’s a helpful example…

  1. We are a partnership - and you need to be a limited company, or under the duty to pay UK corporation tax (like a foreign entity with a UK branch can be) in order to claim the relief...
  2. We are paid by the hour (hopefully)... and as such we are fully recharging our work, and so are not at risk for our work in terms of cost. This means as we are recharging our work ….if we are doing R&D... it is the client who gets the benefit and should be claiming it. And…
  3. We aren't really solving unknown problems in science and technology

Damn... well it certainly does feel like R&D to me sometimes... So you’re saying that I can't be contracted to do this work for someone else?

Clark says...
Oury says...

Not if you are charging all of your time, and/or don't own the IP you create. It needs to be for your trade, you need to be incurring risk (so you could be under a fixed fee), and you would expect to own the IP you own at the end of it. These rules aren't black and white there are instances where you might know the IP but it's still R&D, or you are charging for the work, but it's still R&D - but that's where you would need advice.

Okay - cool. Or rather warm. Too cold to say cool. Okay - what else you got in your happy sack of tax joy then Mr. Taxman?

Clark says...
Oury says...

Video Games Tax relief.

Please please please tell me I get to play video games and get tax back?

Clark says...
Oury says...

Nope. But you get to make them and get financial help.

Not exactly party of the century, but go on then...

Clark says...
Oury says...

Effectively, thanks to the Canadians coming up with such a generous scheme and nicking all our developers… UKIE and TIGA lobbyed the government to support Video Gaming in the UK (as we were world leaders in it) and amazing the Tax man agreed.

Amazing… So what did they agree?

Clark says...
Oury says...

They agreed that provided you do enough of it in the UK (or currently the EEA due to EU rules, but you know... maybe... like maybe… this thing is happening) .. and/or what you produce promotes British culture... you can get 20% back of your costs - broadly.

What about costs elsewhere in the world?

Clark says...
Oury says...

Well a bit, not as good as R&D but you can outsource up to £1m anywhere. The way the rules work you don't want much outside of the EEA, and you must do at least 25% of your development in the UK/EU or you start restricting your relief. You need to be the company most closely associated with the development of the game... and you need to get a certificate from the British Film Institute to cover the above.

Knew it. Nightmare.

Clark says...
Oury says...

Actually not too bad, they are very lovely people at the BFI.

Yeah probably cos they get to watch films and play video games all day.

Clark says...
Oury says...

Well, maybe. But don’t be put off by the whole British Culture thing. You don’t have to get a single point in this section if you do enough of it in the EEA, and it is really not hard to qualify for the certificate, and they will support you with it from start to finish.

Okay, and cash again?

Clark says...
Oury says...

Yes either a bigger loss you can use against the game’s success - or you can get some cash. Less than R&D but the good news is it's all on expenditure "just and reasonably apportionable" to the design, production, and testing of the video game.

Like what? Like everything?

Clark says...
Oury says...

Everything that is “just and apportionable."...

What does that mean?

Clark says...
Oury says...

It means HMRC don't want to get into giving out lists or rules, you need to work it out for yourself. It's self-assessment don't you know?... But broadly, somewhere making video games as a focus could claim much of its overhead, rent, light, heat, salaries, etc. A more detailed overview of all the rules can be found here

So wait a second, can you sometimes do both R&D and Video Games Tax relief?

Clark says...
Oury says...

You can, but they need to be entirely separate ventures. You can't start R&D which has bubbled out of a Video Game you are making. You would need to on the one hand solve a problem, and on the other build a game. The game could utilise your R&D knowledge, but R&D can't come from a game if you follow. Also note there are actually a whole range of other tax reliefs related to films, animations, theatre, orchestra, and museums and galleries. They all work in similar ways to the Video Games Tax relief, but are for specific other areas. We just can't talk about them all, and well, Video games is the newest, and maybe the most relevant currently…

Okay got it - anything left in the sack?

Clark says...
Oury says...

Ermm... oh yeah.... just one more thing...

What is it ?

Clark says...
Oury says...

It's something for you... it's a letter from the Taxman...

Oh great... what does it say?

Clark says...
Oury says...

It says Happy Christmas Clark. Don't forget to do your tax return on time.

Right that's it... time for my first festive Christmas drink.

Clark says...

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We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open minded people and think independent thought and debate is essential to help understand, as well as navigate, complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses - we provide information and hopefully some wisdom - and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial way, of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.

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