UK and International Tax news
Changes To Research and Development Tax Relief For SMEs
Friday 20th November 2020
HMRC has announced changes to limit the amount of payable R&D tax credit which an SME can claim.
In the 2018 Budget, the Chancellor announced that, to deter abuse, the amount of SME payable R&D tax credit that a business could receive in any one year would be capped at three times the company’s total PAYE and NICs liability.
The government consulted on the application of such a cap in Spring 2019 and, following consideration of the consultation responses, published a summary of the responses in the 2020 Budget. It also announced that implementation of the cap would be delayed until April 2021 to allow for further consultation on the changes. The latest consultation closed on 28 August 2020.
The SME payable R&D tax credit provides valuable support to loss-making companies as it allows those companies to claim a tax credit worth up to 14.5% of the R&D element of their surrendered losses and receive an immediate cash-flow benefit. However, according to HMRC, the tax credit has become a target for fraud and abuse.
HMRC has recently identified and prevented fraudulent attempts to claim the SME scheme payable tax credit of over £300m. In these cases, companies were set up to claim the cash available through the payable credit even though they had no R&D activity. Also identified were structures set up specifically to claim the payable tax credit despite there being little or no employment or activity in the UK.
Following the latest consultation, HMRC has now issued a policy paper and draft legislation on the proposed changes to limit the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300% of its total PAYE and NIC liability for the period. The claimant company will be able to include group and other related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap and these will be subject to the 300% multiplier.
A company will however be exempt from the cap if its employees are creating, preparing to create or managing intellectual property and it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons.
These changes will apply to SMEs with effect for accounting periods beginning on or after 1 April 2021.
If you would like more information on the above changes, please contact Keith Rushen on 0207 486 2378.