R&D Tax Credit revised cap delayed to April 2021
For everyone waiting for the cap on R&D tax credit to come crashing down in April 2020, the feeling of deja vu is palpable. Just a year ago, we were eagerly awaiting the result 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. The cap was due to be implemented at the start of the 2020 financial year.
To be honest, we weren’t actually expecting anything to change from the proposals already made. The government had though, given an indication back in 2019 that there could be some issues with the re-introduction of the cap as its Budget note stated:
“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.”
And so it seems, with this delayed implementation, that the concern about the impact on genuine companies was concisely conveyed during the consultation by the responding companies. If you would like to read what they said, the government finally issued the initial consultation responses at the time of the Budget 2020 and you can find it here.
Within this summary document, you can also find the reasons why the government announced a second consultation which began on 19 March, was due to close on 28 May, but has been extended to 28 August 2020 because of Covid-19 impact.
Confused? Not even sure what the R&D tax credits are?
R&D tax credits were introduced by the government back in 2000 in a scheme to motivate scientific and technological innovation in the UK. It is designed to allow any company undertaking R&D related to their industry to claim Corporation Tax (CT) relief against certain expenditure; things like subcontracted services, staff costs and consumable items. Qualifying expenditure basically that was outlined by the government.
The relief comes in two levels, both of which are available to loss-making companies:
- Research and Development Expenditure Credit scheme, introduced in the Finance Act 2013 at the time the large company scheme was phased out and which provides companies with a payable credit.
- SME scheme which targets small and medium enterprises with either a CT tax deduction or a payable tax credit.
The team at Adderley Hill provide extensive help and advice to our clients regarding R&D tax credits because they are complex and it can be difficult for a business to identify whether they are eligible or not. Many companies simply miss out through lack of awareness. Whilst the government has introduced a number of changes in an attempt to simplify them, the proposal to reintroduce a cap, even if it is more generous than the previous one, looks like it is reintroducing some unintended consequences.
What is the R&D tax credit cap?
To manage the government’s commitment, the R&D tax credits were introduced with a cap on the payable tax credit so that it is equivalent to the company’s total PAYE/NIC payment for the period. But this means that small companies and start-ups which frequently have low PAYE/NIC liabilities because they have low employee numbers are unfairly penalised.
Things got better with The Finance Act 2012 which removed the cap and since then the amount of R&D tax credit claims has increased. Sadly, not all the claims were genuine which is why the government has looked at how to stop these fraudulent claims.
Their solution has been to reintroduce the cap for loss-making companies. The cap they proposed back in 2018 and which is still proposed, is equivalent to three times a company’s PAYE and NICs during the accounting period. So it is an increased amount against the original cap, but it reintroduces some of the complexity in the process and again penalises small companies.
Why manage the fraud with a cap?
That’s a good question. Accordingly to the 2018 Budget note, the fraudulent companies tend to employ a small number of people and cannot show payment of PAYE and NICs. The government estimated 96% of genuine companies claiming tax credit will be unaffected. But the small start-ups with legitimate low PAYE and NIC liabilities are still impacted.
So to the deja vu – here we are again with a consultation and a cap due to be introduced, now April 2021 with inclusion in the Finance Bill 2020-21. The government is calling for the businesses that commented in the original consultation to make further comments in the second consultation – a link can be found here.
Will anything substantial change? We will have to wait and see. In the meantime, if you have any queries about R&D Tax Credits or would like to see if you are eligible to claim for them, give the team at Adderley Hill a call.
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