Taxation Notes

SAO Provisions

Question 1: Giant Gyms Limited

  • Scenario: Giant Gyms Limited (GIANT), a UK-incorporated company operating gyms in Northern Ireland, is part of an international corporate group headed by Health Matters Inc (HEALTH), a US company.
  • Turnover: The total turnover of UK tax-resident companies in the group for the year ended 31 March 2024 was £234 million. This was the first year it exceeded £200 million.
  • Net Assets: The net assets of the UK tax-resident companies have never exceeded £2 billion.
  • Zach Zucker's Role: Zach Zucker, a director of GIANT, is responsible for the finance function and is unsure if SAO provisions apply to GIANT. If they do, he will be appointed as GIANT’s SAO.

SAO Provisions Applicability

  • A UK-incorporated company falls under the SAO provisions if it has a turnover exceeding £200 million or a balance sheet total exceeding £2 billion in the preceding financial year, either alone or when aggregated with other UK companies in the same group.
  • In GIANT's case, the UK group turnover in 2024 was £234 million, exceeding the £200 million threshold. Therefore, GIANT is a qualifying company for the SAO provisions in the 2025 period.

Zach Zucker's Duties as SAO

  • Take reasonable steps to ensure the company establishes and maintains appropriate tax accounting arrangements.
  • Monitor these arrangements and identify any shortcomings.
  • Provide a certificate to HMRC after the financial year-end, on or before the accounts filing date, confirming the appropriateness of the company's tax accounting arrangements.

Penalties

  • A penalty of £5,000 is chargeable on Giant Gyms for failure to notify the name of its SAO within certain timescales.
  • A £5,000 penalty is potentially payable by Zach personally if he fails to comply with the SAO legislation.

Question 2: Duties and Penalties of SAO

Duties of a Senior Accounting Officer (SAO)

  • The SAO of a qualifying company must provide a certificate to HMRC after the end of the company’s financial year, on or before the accounts filing date.
  • The SAO must take reasonable steps to ensure the company establishes and maintains appropriate tax accounting arrangements.
  • This includes monitoring the arrangements and identifying any aspects that fall short of the requirements.
  • The certificate provided to HMRC must include a statement confirming the position in relation to the above duties.

Potential Penalties for Non-Compliance

  • A penalty of £5,000 is chargeable on the qualifying company for failure to notify HMRC of the name of its SAO within specified timescales.
  • A further penalty of £5,000 is payable by the SAO for failure to comply with the SAO legislation or to provide an annual certificate.

Question 3: Australian Holidays Limited

Scenario

  • Australian Holidays Limited (AUSTRALIAN HOLIDAYS) is a UK-incorporated trading company that prepares its accounts to 31 March each year.
  • Anna is the Managing Director and owns 100% of the shares. The company has decided to cease trading on 31 March 2025 due to adverse trading conditions.

Statement of Profit or Loss

  • Turnover: £1,325,750
  • Cost of Sales: (£1,153,300)
  • Gross Profit: £172,450
  • Administration Expenses: (£444,255) including:
    • Brand royalties payable: £65,000
    • Depreciation: £34,540
    • Legal and professional fees: £67,870
    • Redundancy payments: £75,000
    • Rent and rates: £13,350
    • Sundry expenses: £4,540
    • Insurance: £6,000
    • Client entertainment: £2,000
    • Wages and salaries: £203,705
    • (Profit)/loss on disposal of property: (£27,750)
  • Other Income: £14,200 (Bank interest)
  • Net interest payable: (£12,705)
  • Profit / (Loss) before tax: (£270,310)

Notes to the Accounts

  • Brand royalties were payable to Aussie Adventures Limited, an unrelated Australian company, but will not be paid until May 2025.
  • Three employees each received a termination payment of £25,000, having over 10 years of service. The statutory redundancy payable was £5,750, £4,400, and £7,100 respectively.
  • Sundry expenses include a Companies House late filing penalty of £750 and donations to UK registered charities of £400.
  • AUSTRALIAN HOLIDAYS incurred £75 per month for a life insurance policy in respect of Anna.
  • The company took out a bank loan to purchase shares in another company, but the acquisition was aborted.

Corporation Tax Computation Adjustments

  • Non-trade Interest Paid: Add back £12,705.
  • Depreciation: Add back £34,540.
  • Client Entertaining: Add back £2,000.
  • Redundancy Payment: Add back £9,400 (explained below).
  • Companies House Filing Penalty: Add back £750 (not tax deductible).
  • Donations to UK Registered Charities: Add back £400 (qualifying charitable donations).
  • Non-trade Interest Received: Deduct £14,200.
  • Profit on Disposal of Fixed Assets: Deduct £27,750.
  • Keyman Insurance: No adjustment needed.
  • Brand Royalties: No adjustment needed.

Redundancy Payment Calculation

  • Statutory redundancy payments are allowable. Additional payments are deductible up to three times the statutory amount on cessation of trade (4 x statutory redundancy).
Employee 1 (£)Employee 2 (£)Employee 3 (£)Total (£)
Statutory5,7504,4007,100
4x Statutory23,00017,60028,400
Redundancy Paid25,00025,00025,00075,000
Deduction Allowed23,00017,60025,000(65,600)
Amount Disallowed9,400

Notes Explanation of Adjustments

  1. Statutory Redundancy Payments: Allowable, with certain conditions for additional payments on cessation of trade.
  2. Companies House Late Filing Penalty: Not tax deductible.
  3. Donations to UK Registered Charities: Qualifying, but provide relief last so no relief is available in trading loss.
  4. Keyman Insurance: Normally taxed in Anna’s hands but employment treatment take precedence as Anna is a company director.
  5. Brand Royalties: Deductible as paid to an unconnected company.
  6. Depreciation: Not tax deductible; instead deduction will be claimed for capital allowances.
  7. Client Entertainment: Not tax deductible.
  8. Interest Payable: Non-trade interest, loan used to acquire a new company.
  9. Interest Receivable: Non-trade interest under loan relationship rules.
  10. Profit on Disposal: Disposal of chargeable asset; chargeable gains calculation required.

Tax Adjusted Trading Loss

  • Tax adjusted trading loss: (£252,465)

Question 4: Pretty Paints Ltd (PPL) and Cool Colours Ltd (CCL)

Scenario

  • George Donovan owns Pretty Paints Ltd (PPL).
  • PPL is considering acquiring 100% of Cool Colours Ltd (CCL), a competitor, which has significant unused trading losses carried forward.
  • George believes that as both companies would be in a group post-acquisition, CCL's losses would be available for group relief.

Conditions to Preserve Trading Losses in CCL

  • As the acquisition of CCL will be deemed to be a change of ownership because PPL would directly acquire more than half of CCL’s ordinary share capital, the anti-avoidance rule means additional conditions must be met in order for CCL to be able to set the trading losses carried forward against future profits total arising as this is a trading loss post 1 April 2017.
  • To preserve the availability of CCL’s trading losses carried forward, CCL must not have had a major change in the nature or conduct of its trade within any period of five years beginning no more than three years before the change in ownership.

Major Changes in Trade Nature or Conduct

  • A major change includes a major change in the type of property dealt in or services provided, or a major change in customers, outlets, or markets.
  • Such a change is regarded as occurring even if the change is the result of a gradual process that began outside the three-year period.

Small or Negligible Activities

  • If the scale of activities in CCL's trade has become ‘small or negligible’ before being revived at any time after the change in ownership, then the brought forward trading losses cannot be set against total profits arising after the change of ownership.

Group Relief and Loss-Buying Provisions

  • These loss-buying provisions discourage purchasing shares in a company to obtain the benefit of accumulated trading losses carried forward.
  • As 100% of CCL’s shares would be obtained, this would create a group for group loss relief purposes.

Group Loss Relief Restrictions

  • A company that newly joins a corporation tax group is also treated as a change in ownership scenario.
  • Any pre-acquisition trading losses cannot be surrendered as group relief for offset against group profits for a period of five years after the change in ownership, even if the anti-avoidance rules do not deny the carry forward of these losses.

Post-Acquisition Trading Losses

  • Any trading losses incurred post-acquisition will potentially be available for group relief, subject to the relevant conditions being met for surrender.

Question 5: iFoto Limited

  • Scenario: iFoto Limited is undertaking a research and development (R&D) project, iFOTOiLIFE, which HMRC has confirmed qualifies for R&D tax purposes.
  • Taxable Total Profits: £1,930,350 before any R&D tax relief.
  • R&D Revenue Expenditure: Allowed as a normal trading deduction in arriving at taxable total profits.

Information for R&D Claim

  • Gross Staffing Costs: £550,000
  • Pension Contributions: £70,000
  • Consumables: £49,000
  • Professional Fees: £35,000

Notes

  • Gross staffing costs are before employer’s NIC of 13.8%. Both gross staffing costs and pension contributions relate to employees directly involved in the R&D project 100% of the time.
  • Professional fees were paid to an unconnected privately owned UK-based business (not a company) that runs a lab facility.

R&D Tax Relief

  • Despite being an SME, iFoto Limited can only claim under the merged R&D expenditure credit (RDEC) scheme as it is profitable. Relief is available only for SMEs under the enhanced R&D intensive support scheme if the company is loss-making and meets the 30% intensity threshold.
  • Under the merged RDEC scheme, the company can claim a 20% taxable RDEC on its qualifying R&D revenue expenditure.

Claim for R&D Tax Relief

  • Qualifying R&D Revenue Expenditure:

    • Gross wages: £550,000
    • Employer's NIC at 13.8%: £75,900
    • Pension scheme contributions: £70,000
    • Consumable items: £26,250
    • Sub-contracted costs: £22,750

  • Total qualifying R&D revenue costs: £744,900

  • 20% taxable R&D expenditure credit: £148,980

Corporation Tax Computation

  • Taxable total profits before R&D relief: £1,930,350
  • Taxable R&D expenditure credit: £148,980
  • Taxable total profits: £2,079,330
  • Corporation tax thereon at 25%: £519,833
  • Less: R&D expenditure credit: (£148,980)
  • Total corporation tax: £370,853

Notes on Calculations

  1. Gross salaries plus employer’s NIC qualifies for relief. Pension contributions also qualify.
  2. Consumable items used in a project qualify for relief.
  3. Under the RDEC scheme only 65% of sub-contracted costs paid to unconnected sub-contractors in the UK qualify. As the payment was made to a local business which is not a company, 65% of costs qualify at £22,750 (£35,000 x 65%).

Question 6: Medsoftech Ltd (MED)

  • Scenario: Medsoftech Ltd (MED) is a Northern Ireland-based company specializing in medical and pharmaceutical technology. It began a significant new research and development (R&D) program during the year ended 31 March 2025. HMRC has confirmed that the activities meet the definition of qualifying R&D activities.
  • Expenditure:
    • £200,000 on salaries and related costs.
    • £150,000 on consumables.
    • £350,000 on sub-contractors.
  • Notes: Salaries consist of full-time wages (£148,000), part-time wages (£25,000), secretarial support (£12,500), and employer pension contributions (£14,500). The R&D payments made to UK-based sub-contractors are to parties not connected with MED and did not conduct any R&D themselves.
  • MED incurred a trading loss of £2,175,000 before R&D tax relief with total expenditure of £1,500,000 in 2025 and relevant expenditure on workers was £100,000. The company expects to continue to be loss-making in 2026 and was loss-making in 2024.

Potential Relief Under ERIS

  • Claim is assessed under enhanced R&D intensive support (ERIS) scheme as MED is a loss-making SME and meets the R&D intensity condition.
  • Expenditure:
    • Staff costs £172,500
    • Consumables £150,000
    • Subcontracted R&D £227,500
  • Total qualifying R&D revenue costs £550,000 with an additional deduction @ 86% of £473,000.
  • Tax adjusted trading loss before R&D £2,175,000 giving a revised tax adjusted trading loss of £2,648,000.

Notes on Calculations

  1. R&D staff £148,000, Part time R&D staff (£25,000 x 40%) £10,000 and Pension costs - R&D staff £14,500 giving total qualifying staff costs of £172,500
  2. Where the company subcontracts R&D work to a third party, relief is only available where the sub- contractor is UK based and it is not a company which conducts R&D in relation to the work carried out for the contractor. 65% of the payments made to them may be claimed £227,500 (£350,000 x 65%).

Tax Credit

  • MED may surrender the lower of the following for a 14.5% repayable R&D tax credit instead of claim relief for the trading:-
  • The unrelieved trading loss - £2,648,000; or
  • 186% of qualifying R&D revenue expenditure £1,023,000 (£550,000 x 186%).
  • Claimable tax credit equates to £148,335 (£1,023,000 x 14.5%).
  • Trading loss remaining as the full amount couldn't be surrendered equals £(1,625,000).

Question 7: Fishing Solutions Limited (FISHING)

FISHING Scenario

  • FISHING which is based in London, is a SME for R&D tax relief purposes, has incurred costs researching new fishing techniques that use sonar technology.
  • Staff costs [Note (i)] £120,000, R&D payments made to sub-contractors [Note (ii)] £25,000 giving a total of £145,000.
  • Note (i): Staff costs include the following: Employees directly involved in R&D activities £85,000, Wages for an employee whose role is solely to provide secretarial and administrative support to the R&D team £15,500, Redundancy payment for an employee who was directly involved in R&D activities £12,250 and Secondary Class 1 National Insurance Contributions for employees directly involved in R&D activities £7,250.
  • Note (ii): The R&D payments made to sub-contractors are to a company that is connected with FISHING. The costs incurred by the sub-contractors were £30,000. The sub-contractors did not undertake any R&D and are based in the UK.

R&D Claim

  • Total qualifying R&D revenue costs = £117,250
    • Staff costs - £92,250
    • Subcontracted R&D - £25,000

R&D Tax Relief

  • If profitable - receives a taxable R&D expenditure credit (RDEC) under the merged RDEC scheme which is equal to 20% of the qualifying R&D revenue costs incurred.
  • Northern Irish companies within the ERIS are not subject to the restrictions for relief on payments to overseas subcontractors or providers of externally provided workers, and instead are subject to a rolling three-year limit on relief.

Question 8: Madpots Ltd (MADPOTS)

Scenario

  • Madpots Ltd (MADPOTS), manufactures ceramic pottery in Enniskillen, Northern Ireland.
  • MADPOTS is considering investment in research and development (R&D) activity involving alternative materials used in its products. The activities would require capital investment and additional revenue expenditure.
  • The company expects to incur approximately £100,000 in capital investment and £250,000 in revenue expenditure in the 12-month accounting period ended 31 March 2026.

Key Assumptions

  • MADPOTS pays corporation tax at the main rate.
  • MADPOTS is highly profitable.
  • Tax rules remain consistent between the financial years 2024 and 2025.

Relief for Capital Investment - £100,000

  • Available for R&D purposes via the capital allowances regime.
  • 100% Research and Development Allowances may be claimed on the qualifying R&D capital expenditure on the new building, instead of claiming relief of 3% on a straight line basis under the Structures and Buildings Allowances regime.
  • MADPOTS should be able to claim capital allowances of £100,000 in its accounting period ended 31 March 2026.

Relief for Revenue Expenditure - £250,000

  • As MADPOTS is profitable, the company will be able to claim a taxable R&D expenditure credit (RDEC) under the merged RDEC scheme which is equal to 20% of qualifying R&D revenue costs incurred.

Qualifying R&D Revenue Expenditure Includes:

  • Staff costs - directly carrying out the R&D.
  • Software - directly carrying out the R&D.
  • Payments to the subjects of clinical trials.
  • Consumable or transformable materials - fully used up in R&D process & not sold later.
  • Utilities (power, heat and light).
  • Certain qualifying subcontracted R&D costs.
  • Cost of certain externally provided workers.
  • Data licences and cloud computing services.

Taxation and Saving

  • On the basis that the entire £250,000 represents qualifying R&D revenue expenditure, an RDEC of £50,000 will be available to claim bringing the total corporation tax saving on this expenditure to 115% i.e., £287,500 (115% x £250,000).

Question 9: RECYCLE

Senior Accounting Officer (SAO) Provisions

  • A company will fall within the SAO provisions and will be a "qualifying company" where:

    • it is incorporated in the UK, and
    • either alone, or when its results are aggregated with other UK companies in the same group, in the preceding financial year:
      • turnover is more than £200 million, and/or
      • there is a relevant balance sheet total of more than £2 billion.

Obligations Imposed on a Qualifying Company

  • The person appointed as the SAO must take reasonable steps to ensure that the company establishes and maintains appropriate tax accounting arrangements.
  • As part of this duty, an SAO must monitor the arrangements and identify any respects in which the arrangements fall short of the requirement.
  • The SAO must provide a certificate to HMRC stating whether the company has appropriate tax accounting arrangements, or, where it does not, an explanation must be provided.
  • The certificate must be submitted to HMRC on or before the filing date for the accounts.

Potential Penalties for Failure to Comply

  • £5,000 assessable on the SAO for failure to comply with the duty of taking reasonable steps to ensure that the company establishes and maintains appropriate tax accounting arrangements.
  • £5,000 assessable on the SAO for failure to provide a certificate or for providing an incorrect certificate.
  • £5,000 assessable on the company for failure to notify HMRC of the name(s) of the person who was SAO throughout the financial year.

Question 10: NewLabs Limited (NLL)

NLL R&D Program and Expenditure

  • NewLabs Limited (NLL), based in Northern Ireland, began work on a new research and development (R&D) program that meets the definition of qualifying R&D activities.
  • NLL is an SME for R&D tax relief purposes.
    • Market research £ 12,000
    • Salaries and related costs (Note 1) £ 320,000
    • Consumables £ 86,000
      NOTE 1: Salaries consist of the following: • £ 302,000 for wages and salaries paid to employees who are directly and actively involved in R&D activities on a full time basis; and • £ 18,000 for wages paid to a staff member who provides administrative support to the R&D team.

R&D Tax Relief

  • As the company is profitable, relief is only available under the merged R&D expenditure credit (RDEC) scheme.
  • Salaries (Note 2) - £302,000
  • Consumables - £86,000
  • Total qualifying R&D revenue costs £388,000
  • 20% RDEC £77,600

Net Corporation Tax Saving

  • 20% taxable RDEC £77,600
  • Less corporation tax at 25% (£19,400)
  • Net corporation tax saving £58,200

Question 11: Tax Strategies Online

Qualifying Company Definition

  • UK-registered companies, partnerships and permanent establishments of groups with turnover of £200 million or more, or gross assets of £2 billion or more, on the last day of the previous financial year; or
  • Multinational businesses with any operations (regardless of size) carried out through UK companies or permanent establishments that have consolidated turnover of €750 million or more.

Minimum Information Requirements

  • The company’s approach to risk management and governance arrangements in relation to UK tax;
  • The company’s attitude towards UK tax planning so far as it affects UK tax;
  • The level of risk that a company is prepared to accept in relation to UK tax; and
  • The company’s approach towards its dealings with HMRC.

Question 12: Farming Equipment NI Limited (FENI)

Scenario

  • One of two UK trading companies in the FEE Group and is a wholly owned subsidiary of Farming Equipment Europe Ltd (“FEE”), the holding company of the FEE Group, which is also incorporated and tax resident in the UK.

Country-By-Country (“CbC”) Rules

  • An entity is required to submit a Country-By-Country (“CbC”) report for any period if it is part of a multinational enterprises (“MNE”) Group, and the group passes both of the following two tests:-

    1. it has two or more enterprises that are resident for tax purposes in different jurisdictions; and
    2. it had consolidated group revenue of more than €750 million or more in the previous period.

Application to FEE Group

  • FEE Group meets 1. above as it is an MNE Group as it has companies tax resident in more than one jurisdiction.
  • However, the consolidated group revenue in the previous financial year, i.e. y/e 31 March 2024 is less than €750 million and thus the CbC rules do not apply to the FEE Group in the 2025 accounting period.

Question 13: Waste Re-Gen Group

Senior Accounting Officer (“SAO”) provisions

A company will fall within the SAO provisions and will be a "qualifying company" where:-

  • it is incorporated in the UK, and
  • either alone, or when its results are aggregated with other UK companies in the same group, in the preceding financial year:-
    • turnover is more than £200 million, and/or
    • there is a relevant balance sheet total of more than £2 billion

The Senior Accounting Officer (“SAO”) of a qualifying company must provide a certificate to HMRC after the end of the financial year of the company on or before the accounts filing date.

SAO Obligations and Penalties

  • To take reasonable steps to ensure the company establishes and maintains appropriate tax accounting arrangements.
  • To monitor the arrangements and identify any aspects in which the arrangements fall short of the requirement.
  • A penalty of £ 5,000 is chargeable on the qualifying company for failure to notify the name of its SAO within certain timescales.
  • A further penalty of £ 5,000 is payable by the SAO for failure to comply with the SAO legislation; or to provide an annual certificate.
  • There could also be a £5,000 penalty if a company fails to notify HMRC of the name/s of the person who was the SAO throughout the financial year.