The rules regarding R&D (research and development) tax credit claims for the SME scheme are changing from 1 April 2021 and it could affect the ability of some businesses to obtain the full benefit from this important tax relief.
The Government is introducing a new PAYE cap on qualifying R&D expenditure, which will attempt to prevent abuse of the R&D tax credit system.
The new measures will limit the amount of payable R&D tax credit that an SME can claim to just £20,000, plus 300 per cent of its PAYE & NIC liabilities for the period.
A company making a small claim for payable credit below £20,000 will not be affected by the cap, but those that are not exempt from this rule will face challenges.
A company’s claim will be exempt from the new measures if it meets two tests:
- a business’s employees are creating, preparing to create or actively managing intellectual property (IP); and
- its expenditure on work subcontracted to, or externally provided workers (EPWs) provided by, a related party is less than 15 per cent of its overall R&D expenditure.
While many businesses may be unaffected by these changes, companies that are heavily reliant on subcontracted work for their R&D projects may find that they are limited as to how much tax relief they are eligible for.
This will be a worrying sign for many start-ups, IT and tech companies, who often rely on subcontractors and outside experts when conducting R&D work.
Claims based on tax years ending before 1 April 2021 will not be affected. However, if a business’s financial year straddles this change, they will need to divide their claim into two accounting periods.
The portion of the claim based on eligible expenditure incurred in the first period before 1 April will not be subject to a cap, while the portion of a claim based on expenditure after 1 April may be capped where necessary.
It is important to note that the PAYE Cap only applies to the surrendered tax credit. It does not apply to claims where the R&D enhanced expenditure reduces a business’s Corporation Tax liability, or where losses are carried forward or relieved.
The new rules surrounding intellectual property also create additional checks and processes when making a claim, which makes it all the more important for businesses to seek professional advice from experienced R&D tax advisers when assessing R&D projects.
To find out how this change may affect you and your business, please contact us.