A manufacturing company purchases new office premises. Thirteen years later,
the finance director discovers for the first time that the company could have
been claiming additional capital allowances.
More aggressive tax planning wipes 25 per cent off 2004’s tax bill. For years
the company has been dragging along an unnecessary tax liability like an
unwanted ball and chain.
A large quoted company that specialises in polymer technology has, not
surprisingly, a strong appetite for research and development. But it has not
been quite so hungry to claim the tax allowances which go with some R&D.
Recently, the company’s advisers have agreed with HM Revenue & Customs
back-dated R&D tax allowances for 2002, 2003, 2004 and a claim for 2005.
Total value: £600,000.
Welcome to the world of tax relief where FDs try to persuade the rest of the
company that the Revenue is simply itching to give back money if only everybody
can identify the spends that qualify. But with annual finance acts adopting
tombstone proportions, identifying proliferating reliefs, then making sure
they’re picked up and claimed, is becoming an ever more complex task.
It wouldn’t be so bad if the rest of the business had tax relief on the mind.
But, not unnaturally, managers at the sharp end are more concerned with making
commercial decisions than with the intricacies of the tax implications of them.
It’s not surprising, then, that some FDs are tempted to adopt a tax sign-off
process of Stalinist rigour for each financial transaction negotiated by
business managers. But Bernard Sweet, the director and head of corporate tax at
Chiltern Group Services, thinks that’s a self-defeating approach. “You don’t
want every decision tax reviewed and signed off by the FD or tax manager because
often what happens is that somebody just signs it so that the transaction can go
through,” says Sweet.
“What you need is a much more proactive education of the business about tax
matters. Managers need to know that they must think about tax, certainly part of
the time,” he adds. “In large organisations that have their own tax department,
it’s part of the tax manager’s role not only to be clever about tax, but to
communicate the issues and keep them high on people’s agendas.”
Dafydd Williams, a tax manager at the financial advisory group Smith &
Williamson, agrees that it’s important for operational managers to be aware of
the tax implications of their decisions. “The operational manager on a project
should be required to discuss the tax implications with the finance team or tax
advisers,” he says.
“Managers should confirm this has been done as part of the approval process.
But for this to work, it’s important to prioritise based on the size of the
transaction – for example, £100,000, depending on the size of the business.”
Andrew Green, head of tax in the London office of accountants Mazars,
underscores that decisions in corporates with tax relief implications are driven
by commercial logic rather than tax allowances, especially when the allowances
operate at the financial margin. “For example, there are some new capital
allowances that have come in over the years to promote what I would call
green-type activities,” he says. “But the reality is that companies are not
going to invest in assets like those if they don’t fit with their commercial
objectives or are not acceptable to the workforce.”
Of course, there may be cases where the commercial logic and tax advantages
do come together. A company might feel it enhances its reputation to limit staff
to fuel-efficient cars and take advantage of the tax reliefs that go with them.
The trouble is that senior staff may take the view that the car of their choice
is one of the treasured perks and they’re not giving it up to save the planet or
cut the company’s tax bill.
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So, faced with complex regulations and uncooperative staff, what’s an FD to
do? The first step, most in the tax community agree, is to get a tax strategy in
place which at least conveys something of what the company is seeking to
achieve. The problem with that is that some FDs don’t like to put their tax
strategies in writing in case HMRC asks to see them. There’s nothing like a
full-on aggressive strategy for getting a combative inspector of taxes’
“However your strategy is recorded, it’s important to have one. The minute
you charge somebody with trying to manage tax affairs, if they don’t know what
they’re trying to achieve, it’s impossible to deliver,” says Paul Fay, tax
director at accountants Horwath Clark Whitehill. That’s not the only difficulty
with tax strategies.
When strategies are written, they tend to employ judicious and measured
language specifically to avoid arousing tax inspectors’ ardour. But that makes
it more difficult to cascade its hidden and more precise meaning, down through
the company to the people who take decisions based on it.
In Fay’s view, an effective way round this in a large company is for the tax
department to act as a kind of knowledge bank on tax matters. “It’s not
realistic for everybody to become experts in tax,” says Fay. “While management
should take responsibility for tax, they shouldn’t be expected to know
everything and, therefore, the need to have specialists they can refer to is
But knowing the tax strategy and having a source of ready reference isn’t likely
to be enough to motivate managers to take tax-efficient decisions, so more
companies are basing manager bonuses on post-tax rather than pre-tax results. On
the face of it, that seems like a great way to make managers look more closely
at the tax impact of their decisions.
In practice, Sweet believes there are arguments on both sides. “There could
be the manager who’s doing a great job, then gets hit with a tax bill he can do
nothing about. That’s just unfair. On the other hand, you may have the manager
who’s cavalier about tax so that he brings problems on his own head.”
Whether bonuses take into account tax or not, there is certainly a strong
argument for considering the consequences of decisions in managers’ annual
performance evaluations. Sweet quotes the example of a human resources director
who decides to establish a member of staff overseas. “Sending somebody to, say,
Russia or France can have corporate tax consequences,” he says. “That person
could end up giving the company a tax presence in the country concerned.” It’s
not unreasonable to lay a blunder like that at the HR directors’ feet.
At the end of the day, upfront planning removes a lot of the tax relief grief
further down the track. Green has spent time in large companies looking closely
at the chart of accounts to see if changes in the way it operates could help
from the tax perspective. “If you can be certain that you’ve coded everything in
such a way that you’re producing detailed analyses of both capital and revenue
costs which are properly allocated, you will get a better tax computation
without having to spend a lot of time post-event analysing the expenditure,” he
Paradoxically, claiming tax reliefs could become both more urgent and more
difficult in the future. That’s because, under political pressure, HMRC is on a
mission to crack down on tax avoidance schemes. The Revenue is thought to be
keen to blur the distinction between evasion – always a no-no – and avoidance,
traditionally the happy hunting ground of the corporate tax specialist. One
insider says the Revenue is searching for a high-profile scalp such as a major
company it can prosecute for a dodgy avoidance scheme.
Expect future finance bills to contain more draconian anti-avoidance measures
while using minor tax concessions to gild the lily. “The last finance bill
contained an array of antiavoidance stuff and some fairly minor reliefs about
home use of computers and getting to work on bikes,” says Sweet. “I think
everybody who read that stuff said, ‘What!’”
R&D mind games
Finance directors seeking tax reliefs for research and development enter a
Kafkaesque world in which the Revenue defines R&D differently to everybody
This leads to expensive fights to gain reliefs which ought to have gone
through on the nod. One company working in remote network synchronisation was
dismayed to discover earlier this year that the Revenue was opening an enquiry
into its 2003 and 2004 R&D relief claims.
The nub of the problem was whether the relief was claimed for research that
really did make a “technological advance”. Unlike some continental European tax
authorities, UK inspectors don’t employ engineers and technologists to advise
them. As a result, they sometimes end up wallowing in their own ignorance at the
expense of the company waiting for its relief.
In this case, it took a lengthy conversation between the company chairman and
the tax inspector to explain exactly how the research undertaken had produced
genuine breakthroughs. In the end, the company received its tax refund of
£33,600 but £5,000 had disappeared on professional advisers.
Research & regulation
The Treasury issued a consultation document in July 2005 to “enhance” the
research and development tax credits scheme which has had a number of problems
relating to the definition of qualifying R&D on “development” work.
These rules were clarified last year. But tax inspectors are clamping down
after a legal victory against BE Studios which the High Court ruled had claimed
R&D tax credits, even though there was “no evidence” the company was engaged
in qualifying tax work.
Not worth the
The problem with some tax reliefs is that they’re so complex the cash benefit is
likely to be consumed in the cost of pursuing them.
Enhanced capital allowances (ECA), introduced in section 65 of the 2001
Finance Act, are a case in point.
One of the government’s aims behind ECAs was to build its “green”
But the business world isn’t interested. The criteria used to qualify assets
are too complex and onerous, ECAs are not available to leasing businesses –
which excludes property landlords – and they merely accelerate existing tax
relief for plant and machinery write-downs from 25 per cent to 100 per cent in
the first year.
“We reviewed ECAs for a major retailer and found that the net present value
of the claim would have been about 5 per cent,” says Alun Oliver, managing
director of property taxation specialists E3 Consulting.
“The retailer felt the cost benefit was marginal and decided to stick with
plant and machinery allowances.”