SME R&D tax relief cap set at £20K plus employment costs

As part of its recent set of tax policy announcements, the government has confirmed changes to the R&D tax credit regime for SMEs designed to reduce fraud and abuse

The SME payable R&D tax credit provides support to loss-making companies by allowing them to claim a tax credit worth up to 14.5% of the R&D element of their surrendered losses and receive an immediate cashflow benefit.

However, the Treasury said the tax credit has become a target for fraud and abuse and has held two consultations on the issues, the latest earlier this year which resulted in some changes to the proposed legislation. 

The new measures will be included in Finance Bill 2021 and will apply to accounting periods beginning on or after 1 April 2021.

The new rules limit the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300% of its total PAYE and National Insurance contributions (NICs) liability for the period.

There is provision to prevent any PAYE or NIC liabilities counting towards more than one company’s cap, so-called ‘double counting’.

A company is exempt from the cap if meets two tests. These are if its employees are creating, preparing to create or managing intellectual property (IP) and if it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) or connected persons

IP is defined within the legislation and companies will be required to provide documented evidence of this activity, which can include management time spent ‘formulating plans and making decisions in relation to the development or exploitation of the IP.’

These provisions are designed to exempt companies with low PAYE and NIC, but which are nevertheless themselves engaged in genuine, substantial R&D.

In its analysis of the new rules, ICAEW’s tax faculty said that while the increased percentage will help to prevent the cap from applying to certain claims, some companies undertaking genuine R&D activity may still be affected by it.

There is also concern that the requirement to document IP activities might lead to increased professional and compliance costs for companies undertaking genuine R&D, the analysis suggested.

Useful links:

Accountancy Daily roundup: Treasury releases tax policy announcements

Draft legislation

Preventing abuse of the R&D tax relief for SMEs: Second consultation – summary of responses

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