R&D Tax Relief: Preventing abuse of R&D for SMEs

Following our previous blog posts on HMRC’s intention to prevent abuse of the Research and Development (“R&D”) Scheme for SMEs (https://blog.aab.co.uk/rd-tax-relief-preventing-abuse-of-the-sme-scheme) here is a reminder of the upcoming changes to the scheme.

Currently, where SMEs undertaking qualifying R&D activities incur tax losses, they can claim a cash payment from HMRC – known as an ‘R&D tax credit’ – equal to 14.5% of unrelieved trading losses in the period or, if lower, 230% of the qualifying R&D expenditure incurred in the period.

In an attempt to deter abuse of the scheme a cap will be introduced from 1 April 2021 with the effect that the R&D tax credit that a SME company can claim in a period will be restricted to the total of:

• £20,000 plus
• 300% of the company’s total PAYE and NIC liability for the period, together with liabilities of any connected persons undertaking subcontracted R&D for, or providing workers to, the company.

The cap will not apply where a company’s employees are involved in creating, preparing to create, or managing intellectual property, and it does not spend more than 15% of it’s qualifying R&D expenditure on:

• subcontracting R&D to connected persons, or
• externally provided workers supplied to it by connected persons.

The measure will have effect for accounting periods beginning on or after 1 April 2021.

Where a company has an accounting period beginning before, and ending on or after that date, they will be treated as two separate periods and the cap will apply to the period from 1 April 2021.

Practical Points – who is likely to be impacted?

• Loss making R&D tax credits claimants, with low numbers of UK employees, that subcontract R&D to connected or third parties

Practical Points – who is unlikely to be impact?

• If your company is profitable this new measure will not reduce the benefit of R&D tax relief claims as it relates to the amount of R&D tax credit payable following the surrender of tax losses
• If your company is claiming R&D tax relief under the Research & Development Expenditure Credit (“RDEC”) Scheme this measure does not impact the claim. Please note that the RDEC scheme has its own PAYE / NIC restriction on amounts payable to the company
• Companies claiming R&D tax credits below £20,000
• R&D tax credits claimants with significant UK staff costs

If you are considering whether your company may be impacted by these new rules, please contact us to discuss.

Find out more about AAB’s Corporate Tax services.