A cap on payable R&D tax credits for small or medium sized enterprises (SMEs) will be introduced on 1st April 2021 which will limit credits to £20,000 plus 300% of a company’s total PAYE and National Insurance Contributions liability for accounting periods commencing on or after this date.
Background
R&D tax reliefs, including the SME tax credit scheme, are intended to incentivise firms to invest in R&D. These reliefs form a core part of the government’s support for innovation, with the goal of the UK spending 2.4% of GDP on R&D by 2027.
However, the SME tax credit appears to have become a target for abuse, in particular by companies claiming payable tax credits for work carried out by others in circumstances where they have very little substance in the UK.
Following two consultations, the government published its findings on 12th November. These new measures will be included in the Finance Bill and will be introduced in April 2021.
What are the forthcoming changes?
The amount of payable R&D tax credit that an SME can claim in any one year will be limited to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for each accounting period commencing on or after 1st April 2021.
Where a company has an accounting period beginning before, and ending on or after 1st April 2021, they will be treated as two separate periods and the cap will apply to the period from 1st April 2021.
Exemptions to the cap on R&D tax reliefs
A company will be exempt from the cap on R&D tax credits, subject to two conditions: -
- That the company’s employees are creating, preparing to create or actively managing intellectual property and
- No more than 15% of the company’s total qualifying R&D expenditure is spent on subcontracting R&D to, or the provision of externally provided workers by, connected parties
Who will be affected by these measures?
This change might affect companies that claim the SME R&D tax credit in excess of £20,000 and that make extensive use of subcontractors and externally provided workers from related parties. Such companies are therefore strongly encouraged to keep detailed records supporting their claims as related party PAYE and NIC liabilities attributable to the R&D project are also used to calculate the cap.
SMEs that receive payable tax credits under the RDEC scheme will not be affected by these changes.
Next steps
If you think that your company might be affected by these changes to R&D tax credits for SMEs, please do get in touch with the corporate tax team at DRG Chartered Accountants. We would be delighted to discuss your company’s circumstances, the impact and possible next steps.
For further information
Gov.uk website: Policy Paper: Preventing abuse of research and development tax relief for small and medium sized enterprises
Gov.uk website: Consultation Outcome: Preventing abuse of the R&D tax relief for SMES second consultation
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.
