If your company claims Research & Development (R&D) tax credits you may remember the government planned changes to the system for SMEs in the 2018 Budget. At the time it announced that the amount of payable R&D tax credits a business could receive in one financial year would be capped.
The proposed change is being introduced to help prevent abuse of the R&D tax credits system after HMRC identified fraudulent claims totalling hundreds of millions of pounds. Some companies were set up to claim R&D tax credits, even though they didn’t actually undertake any research. Other firms claimed for the tax credits through a UK entity, even though its R&D expenditure wasn’t brought into account within the UK’s tax system.
After consultation earlier this year, the Government has now published draft legislation concerning R&D tax credits for SMEs. So, what are the changes?
Changes to R&D tax credits for SMEs
These are the main changes you need to be aware of:
– SMEs can only claim a payable tax credit up to £20,000, plus 300% of its total PAYE and NI contributions for the period.
– Companies that sub-contract some of the R&D work to a connected company can potentially claim a payable tax credit up to 300% of the relevant PAYE and NI associated to that work (BUT see below for conditions of sub-contracting work)
The cap won’t affect SMEs claiming a payable tax credit under £20,000.
Exemptions to the R&D tax credit cap
The legislation also contains caveats. These are designed to ensure innovative businesses who genuinely perform and use the R&D system correctly don’t lose out. If an SME meets both of these conditions, then it should be exempt from the R&D tax credit cap:
1. The company needs to create or manage the Intellectual Property (IP) generated from the R&D activity. This test should be easy to meet for genuine claimants; and
2. The company’s expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure.
When do the changes come into force?
The changes will have effect for accounting periods beginning on or after April 2021.
Even with the potential of a claim of payable credit being capped, R&D tax credits remain a valuable relief to have. We see huge opportunities across wide-ranging sectors.
We often speak with businesses who still don’t believe R&D tax credits would be applicable to them, R&D for tax purposes is much wider than is often understood. It extends beyond traditional activities taking place in R&D laboratories and development centres to activities which are embedded in the wider operations of a business, we help businesses of all sizes and sectors realise that they can claim for R&D.
As a firm we are committed to supporting our clients to make sure that we maximise relief value, providing a significant cash flow boost – which is likely to be of increasing importance as we enter 2021.
To understand whether this cap will affect your claim, or for a wider R&D tax discussion, please contact Jon Connor using the button below.