Consultation on tackling abuse of SME R&D relief

The government is consulting on changes to research and development (R&D) tax reliefs, first announced at Budget 2018, which are intended to prevent abuse of the small or medium sized enterprise (SME) scheme

The government is introducing a cap on the amount of payable tax credit that a qualifying loss-making business can receive through the relief in any one accounting period.

The cap will be three times the company’s total PAYE and NICs liability for that year and will be implemented from April 2020.

The consultation is seeking views on how the cap will be applied, so as to minimise any impact on genuine businesses, before it is legislated in Finance Bill 2019-20.

The whole of the PAYE and NICs liability which is payable during the accounting period to which the claim relates will count towards the cap, not just that part which relates to staff involved in the R&D activity.

HMRC says it understands that some genuine companies may have low PAYE and NICs liability relative to R&D spend and therefore could be affected by this measure, and the consultation explores ways to address this.

The government is aware that applying a cap on the amount of payable tax credit a company could claim will add some administrative burden for businesses. It is therefore considering applying the cap only to payable tax credit claims above a certain ‘threshold’, so that the smallest claims would be unaffected, keeping things as simple as possible.

However, to prevent abuse from groups making small but numerous claims at or below the defined threshold, the government intends to allow only one ‘below threshold’ payable tax credit claim per year for any given group of companies under common control.

The government is also considering allowing these companies affected by the cap to access the rest of their payable tax credit when they have built up enough PAYE and NICs liabilities in a future year.

Where potentially surrenderable losses cannot be surrendered for a payable tax credit because of the cap, those losses, to the extent that they are carried forward, would still be potentially surrenderable. These ‘carried forward (potentially surrenderable) losses’ can be used as normal in later accounting periods, but companies would also have the option to surrender them in exchange for payable tax credit for a limited period of time – e.g. for two years – if there is sufficient PAYE and NICs liability after any claim which relates to the current year.

Government support through the SME scheme has increased rapidly in recent years. Between 2014-15 and 2015-16 the cost of the scheme increased by 33% to £1.8bn, but HMRC has identified (and prevented) fraudulent attempts to claim the SME scheme payable tax credit totalling over £300m.  In these cases, companies were set up to claim the cash available through the payable tax credit even though they had no R&D activity. HMRC also identified structures set up deliberately to claim the payable tax credit despite there being little employment or activity in the UK.

The consultation closes on 24 May.

Preventing abuse of the R&D tax relief for SMEs.

Report by Pat Sweet

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