Before we start a panic, we need to be clear from the outset that we do not know what the results will be of the government’s consultation on Preventing abuse of the R&D tax relief for SMEs. This consultation was announced in the Autumn Budget 2018, started on 28 March 2019 and closed on 24 May 2019, and won’t be implemented until the new financial year in April 2020. So is no news good news?
So what do we know?
Let’s start with a bit of a re-cap. The R&D tax credits have been around since 2000 when the government introduced a scheme to encourage scientific and technological innovation within the UK. They work by allowing companies carrying out qualifying R&D related to their industry to claim extra Corporation Tax (CT) relief for certain qualifying expenditure like staff costs, consumable items and subcontracted services.
There are two levels of relief – the SME scheme for, bizarrely, SMEs which provides either a CT tax deduction or a payable tax credit; and the Research and Development Expenditure Credit (RDEC) scheme which was introduced in the Finance Act 2013 when the large company scheme was phased out, and enables companies to benefit from a payable credit. Both of these schemes are available to loss-making companies.
The R&D tax credits are fairly complex, it can be difficult to identify whether you are eligible or not and many start-up tech companies miss out simply through lack of awareness. They have also seen a number of iterations with the intention to simplify them; but this proposal to reintroduce a cap, albeit more generous than the previous one, could potentially reintroduce some unintended consequences.
And what is this cap?
When the R&D tax credits were first introduced, they came with a cap on the payable tax credit to the equivalent of one time the company’s total PAYE/NIC payment for the period. Harsh and penalising for small companies and tech start-ups which tend to have low PAYE/NIC liabilities because they invariably have low employee numbers.
There were shouts of joy when The Finance Act 2012 removed the cap for accounting periods ending on or after 1 April 2012. And since then the amount of R&D tax credit claims has increased. Unfortunately, not all of these claims have been genuine, hence the government’s announcement last year.
Whilst clamping down on fraudulent claims is to be applauded, using the age-old ‘hammer to crack a nut’ philosophy, the government has decided to do this by reintroducing a cap for loss-making companies. So now these companies will only be able to receive payable tax credit of up to three times its PAYE and NICs during the accounting period. So yes, it allows an increased amount in comparison to the original cap but in a stroke, it reintroduces some of the complexity it was trying to remove, and of course the penalty incurred by small companies.
Why reintroduce the cap?
Well according to the associated 2018 Budget note, the fraudulent companies typically tend to employ a small number of people and pay no PAYE and NICs. The government estimates 96% of companies currently claiming this tax credit will be unaffected. Small solace to those tech start-ups with legitimate low PAYE and NIC liabilities.
The government, to give it some credit, has acknowledged that this re-introduction of the cap may cause difficulties. Its Budget note states:
“Nevertheless, the government recognises that some genuine companies with UK R&D activity may have low PAYE and NICs liability relative to R&D spend and therefore could be affected by this measure, despite the cap being set at three times their liability.
“In these cases, the companies will still be able to claim payable credit up to the cap with any unused losses carried forward to be set against future profits. The government will also consult on how the cap will be applied, to minimise any impact on genuine UK businesses.”
So, the consultation is closed, and we can only hope that those companies that responded have put in a sufficiently strong case to encourage the government to think again.
The new rules will not come in until April 2020 so it might be worth moving fast and have a discussion with us now about your eligibility before the cap is in place. You can connect with Bryn, our Head of R&D by calling 020 7788 7880 or send an email to [email protected] with any questions or comments.