cooperation tax after long development

[SunnySpring]

We have been developing software in our startup for a while now, privately funded. The product will soon be ready and we have a potential buyer. When the sale is made, the assets in our company will suddenly go up dramatically, as software which was worth nothing has suddenly generated a big amount of income. A lot of corporation tax will be due on the profit. We did have expenses to set against the gain, but not that much. What about the development work we did? Is there an advantage in recording (unpaid) salary as an additional expense into our accounts?

 

[Scalloway]

Is there an advantage in recording (unpaid) salary as an additional expense into our accounts?

If you register the company for PAYE and do RTI returns before 31 March then you can transfer the unpaid salary to the Directors' Loan Accounts. This salary is a legitimate tax deduction and can be withdrawn when funds permit.

 

[Expim Solutions]

There is such thing as R&D tax relief for small and medium business. Hire an accountant that specializes in R&D tax relief, it will pay you back many times.

Google R&D tax relief for small and medium business and HMRC website will give you an idea about before talking to an accountant

 

[SteveHa]

You should have taken advice before starting. R&D credits/relief can only be claimed in respect of costs actually incurred in the R&D, and not in respect of theoretical costs (such as unpaid salary).

By not incurring those costs, you may have cost the company money.

 

[SunnySpring]

If you register the company for PAYE and do RTI returns before 31 March then you can transfer the unpaid salary to the Directors' Loan Accounts. This salary is a legitimate tax deduction and can be withdrawn when funds permit.

Ok. So this means the company would owe me more and more money as time goes buy, via the directors loan and thereby noting an extra expense for itself, in terms of salary payments, which can be set against the eventual income from the software - so that will save corporation tax when the sale happens.
However what would that mean for my personal accounting: I would have a "theoretical" salary gain, I can't actually draw on - would I still have to put that as a taxable income into my personal tax return? Even although the gain to me personally might actually never materialize (if the software doesn't sell after all)?

 

[The Byre]

Hire an accountant! NOW!

The UK has the most complex tax laws on Planet Earth - any attempt to do a DIY accountancy job is on par with DIY brain surgery.

 

[Mr D]

Ok. So this means the company would owe me more and more money as time goes buy, via the directors loan and thereby noting an extra expense for itself, in terms of salary payments, which can be set against the eventual income from the software - so that will save corporation tax when the sale happens.
However what would that mean for my personal accounting: I would have a "theoretical" salary gain, I can't actually draw on - would I still have to put that as a taxable income into my personal tax return? Even although the gain to me personally might actually never materialize (if the software doesn't sell after all)?

Either its income which is then subject to tax (or using up part of your tax allowance) and as not paid out at the time able to take out money in directors loan account without it being income - or else its not wages and therefore not income now and if you later take it out then you will have it subject to tax.

For tax planning use a specialist - an accountant for the company, an accountant or tax specialist for you.

 

[Paul Norman]

I am involved in a company that does software development, and for sure, R and D tax credits have been very helpful.

But, we have an accountant who keeps us informed on this, and we have the claims professionally prepared.

Without that, we would have paid a lot more tax, much earlier than we now will have to.

Of course, when, as is hoped, your software sells well, you will make a profit, and will be able to afford to pay corporation tax.

 

[SunnySpring]

Mr D:

So can I combine your solution:
"or else its not wages and therefore not income now and if you later take it out then you will have it subject to tax. "

With Scalloways solution:
"If you register the company for PAYE and do RTI returns before 31 March then you can transfer the unpaid salary to the Directors' Loan Accounts."
?

In other words, the yearly increase in my directors loan in Scalloways solution, isn't taxable income to my personal tax sheet, until I actually take the money out?

 

[Scalloway]

Salary paid by the company is your income when the company does the PAYE RTI return, not when you withdraw it from the company bank account.

 

[mattk]

Salary paid by the company is your income when the company does the PAYE RTI return, not when you withdraw it from the company bank account.

Would this leave the company with income tax and NI liabilities at the end of every quarter which they'd have to pay out of their non-existent cashflow?

 

[Scalloway]

Would this leave the company with income tax and NI liabilities at the end of every quarter which they'd have to pay out of their non-existent cashflow?

If the salary is less than £8,632 per year no NI will be payable. Income tax will be payable if the person being paid has other PAYE income. As part of the cost of developing the product you may consider lending the company money to pay the PAYE worthwhile.

 

[Chris Ashdown]

Rather than selling have you considered licensing the product

 

[SteveHa]

Notwithstanding identifying the actual costs, I'd be more concerned with ensuring that the other requirements for R&D are met, and specifically,

• That a scientific or technology uncertainty must need to be overcome
• That a competent professional in the field would not be able to easily discern the solution

I qualified as a computer programmer long before I became a tax expert, and I struggle to see how software development could adequately meet these criteria, especially since most software is developed using pre-built libraries these days.

 

[WaveJumper]

You really have some good advice above, take it and go see a professional in this field. You have two issues one the NOW the most tax efficient way to get where you are going, and hopefully the second if you suddenly receive a great windfall of money how are you best going to deal with this .......... you need to be prepared if not you are going to kick yourself later.