From 1 April 2021 new rules will cap R&D tax credit cash claims for loss making SMEs to 300% of the company’s PAYE/NIC liability, unless the claim meets one of two exemptions. These are:
The cash claimed is below £20,000; or
The company is creating or actively managing intellectual property and less than 15% of its total R&D expenditure is on work subcontracted to or using the employees of a related party.
The aim of the rule change is to counter perceived abuse of the rules where claims were possible for artificial R&D arrangements that had little or no substance.
Who will be affected by the new rules?
Loss making companies claiming under the SME scheme that have low payroll costs and high levels of subcontractor or external staff costs are most likely to find themselves caught. That could include many innocent companies with legitimate reasons for structuring their R&D activities in this way. That is why the two exemptions are included, but it is still important to make sure that the conditions are going to be met (and record why) when forecasting R&D tax credit income from 1 April 2021 onwards.
Companies that tend to employ their own staff rather than using third parties are less likely to be caught by the new cap, and it is worth noting that PAYE/NIC liabilities of connected parties can be brought into the cap calculation if they relate to charges that have been claimed as costs of externally provided workers.
Are R&D tax credits still worth claiming?
For most companies that are carrying out qualifying R&D, the answer is still a resounding “yes”. This remains a very generous relief that can provide loss making companies with a cash payment of approximately 33p in the £1 for qualifying costs. Taxpaying companies can reduce their corporation tax bill by 25p for each £1 of qualifying costs.
Ensors corporate tax team has a wealth of experience of R&D tax credit claims, so please contact us if you want to know how we can help you in this area.