If a business wishes to increase its profits while keeping sales steady, the most obvious route is using efficiency savings. By reducing its outgoings, the business will have a wider profit margin but there are several risks associated with such cuts. Efficiency savings often mean asking staff to do more, with fewer resources and this can quickly result in stressed and overworked employees. Over the long term this leaves staff disengaged and demotivated, damaging their performance at work. It can mean product standards fall, customers are lost and talented staff leave, ultimately hitting the company’s bottom line. Such cuts can prove to be a classic false economy. So, how else can a business boost profits when in need of additional revenue without relying on extra sales?
A more positive approach to boosting profits is to look at generating the maximum amount of revenue from existing work and assets, both physical and intellectual. This can be done by ensuring you are claiming any tax relief your business may be eligible for, in the form of research and development (R&D) tax credits, Patent Box, capital allowances and land remediation tax relief. Depending on your company’s line of work, it could claim all three.
These valuable tax reliefs can amount to tens, even hundreds of thousands of pounds every year — sums that can be reinvested to fuel further growth. In the last 11 years, specialist tax consultancy Catax has helped 14,000 businesses in the UK claim back well over £242 million in tax relief in extra profit, with no extra sales needed. Despite this, the majority of eligible firms fail to claim the tax relief they are due. This is largely because of a lack of understanding about how tax relief claims work.
To help small businesses understand how they can increase profit without necessarily increasing sales, Mike Tighe from Catax shares a brief summary of each form of tax relief to help you work out if your business should be claiming.
R&D tax relief
The HMRC definition of R&D is any work that seeks to resolve a ‘scientific or technological uncertainty’ in the form of a new process, product, service or an improvement to an existing one. This can apply to a broad range of work and the R&D does not need to have been successful to qualify. The majority of companies are potentially eligible for R&D tax relief — nearly 80% according to Catax's research. Yet more than half of them have never made a claim, the same survey showed.
Many business leaders do not realize their company is eligible for this tax relief while others don’t know how to go about claiming, or fear it will be too expensive or time consuming. With the average R&D claim worth £56,000 a year, it's worth some time and effort. If your business has developed a new product, service or process in the past two years you are likely to be eligible for R&D tax credits so, if you are not sure how to proceed, seek professional advice from a tax relief expert.
The Patent Box
The Patent Box tax relief was rolled out from 2013 to reward income made from patents with a reduced rate of corporation tax of just 10% — nearly halving the rate of corporation tax payable on intellectual property (IP) related income. Yet take up of this valuable tax break remains very low with more than half of firms never having heard of the Patent Box, Catax's research showed. If your company has registered patents, you should immediately look into how much of your income is generated by them in order to reduce your tax bill.
The Patent Box applies to revenue deriving from patents in many different ways so it's best to seek out expert advice to ensure you are claiming the full value. It's also worth carrying out a full IP audit which will establish whether anything else could be patented to maximize Patent Box savings.
All UK taxpayers who own commercial property — either personally or through a company — may be eligible for capital allowances tax relief. This offsets all the hidden expenses associated with the property such as air conditioning, wiring, heating, lighting and security systems against your overall tax bill. Capital allowances come in different forms with the eligibility and value of claims varying widely according to the many criteria.
The rules are being constantly updated with several changes in the last 10 years alone. The most common mistake is companies under-claiming, as items that could be eligible are missed or not categorized to optimize the claim value. Catax's average client claim totals around £49,000 a year, so it's worth taking the time to make a full and correct claim. This usually requires a detailed assessment of the company’s assets by someone who understands the regulations and categories in detail.
Land remediation tax relief
If a business has purchased land or property and invested in clearing it of potentially harmful materials in order to bring it back into use, then that business can claim tax relief. Land remediation tax relief allows businesses to claim 150% of the cost of cleaning the site against their corporation tax bill. Just 1,500 companies claimed land remediation tax relief in 2017/18 according to HMRC, which is a tiny percentage of the potential pool of claimants.
To qualify, the items cleared must have the potential to ‘damage’ buildings, cause ‘serious harm’ to people or the environment, or pollute water courses such as asbestos, Japanese knotweed or arsenic. The tax relief can be claimed on the costs associated with work to clear the land or buildings of pollutants, such as the cost of the equipment, materials used, subcontractor costs and staff wages where more than 20% of their time is focused on the remediation work. This is a very generous form of tax relief so it's worth companies doing their research to check their claims meet all HMRC’s requirements.
Taken together, all these forms of tax relief can significantly boost annual income without the need for any new sales or efficiency cuts. This is about businesses making the most of what they already have at their disposal.
About the Author
Mark Tighe is Founder and CEO of specialist tax relief consultancy Catax. He launched the company in 2008 and has since built it to an £11.3m turnover business, employing 100 people across five offices in the UK and Canada. Prior to founding Catax, Mark was Managing Director of Carphone Warehouse and Head of UK Business Sales at O2 UK. Mark regularly presents to many top law and accountancy firms across the country, educating professionals on tax relief.