Birmingham Post Article - June 2011

By Lucas Markou, partner at Solihull-based accountants and business advisors Jerroms LLP

Growing businesses rightly complain of the tax and red tape that hampers their development.

But many overlook basic steps that can be taken to cut tax bills.

This year's Budget saw the introduction of more generous tax breaks for small businesses (SMEs) which incur research and development (R&D) expenditure.

This boost potentially applies to a large number of businesses, not all of them small.

It applies to those with fewer than 500 employees and either annual turnover which does not exceed €100m, currently around £90m, or total assets not more than €86m, currently £77m.

Since April, such SMEs have been able to claim double the amount of their eligible expenditure on R&D as a deduction from their profits for corporation tax purposes. Next year the tax relief is set to rise even higher, from £200 to £225 for every £100 spent.

Many businesses miss out because they have the impression that they have to be spending on what might be termed 'pure' or 'blue sky' research, but the reality is different.

Apart from this kind of research, eligible spending can include all kinds of project development and incidental expenditure, including an apportionment of staff and general management costs. R&D tax credits can also be claimed on projects designed to improve production methods or lower costs.

We have found a number of cases where claims can be increased, leading to lower tax bills, and, in some cases, repayment of tax already paid.

Another area for SMEs to look at is the choice between salary and dividend for family companies.

Taking pay as dividends instead of salary can avoid or reduce national insurance contributions. With the recent increases in national insurance, the balance for many remains in favour of dividend if the company has sufficient profits, and if the shareholding is appropriate for the use of dividends in lieu of salary.

Every family campany should also consider accelerating their capital investment to before April 2012, after which the tax deduction for capital spending, known as the annual investment allowance, will be cut from £100,000 to £25,000.

Directors of family companies should also look at the way their shareholdings are structured to maximise on Entrepreneurs' Relief on ultimate sale.

This tax break means that the first £10m of lifetime gains, such as those on sale, are taxed for each substancial shareholder at ten per cent rather than the full capital gains tax rate of 28 per cent.

There have been major changes in pension tax reliefs and SME owner manager can benefit from a good look and from ongoing monitoring.