The UK Government has now made publicly available draft legislation that will cap the amount an SME can claim as a repayable R&D tax credit. The measure, which will affect accounting periods beginning on or after 1 April 2021, limits a repayable credit to £20,000 plus 300% of the claiming company’s total PAYE and NIC liabilities for the period.
The rules allow for an exemption from the rule if a company both creates or manages Intellectual Property and spends no more than 15% of its qualifying expenditure on subcontractors or externally provided workers (EPWs) that are connected parties.
The cap has been introduced as an anti-abuse measure, following a substantial increase in fraudulent claims since a similar restriction was abolished in 2012. It was highlighted in the 2018 Budget announcement that there had been widespread abuse of the scheme, whereby companies were claiming despite undertaking no genuine R&D activities. Additionally, several group structures were found to have been set up with the intention of redirecting costs from outside of the UK, through a UK entity, to access the scheme. In many cases, the companies were incorporated solely for this reason, with no employment or genuine business activity taking place in the UK.
The cap will potentially have major implications for companies that rely heavily on subcontractors and have comparatively low levels of staff costs, typically a characteristic of software companies, amongst others. Others likely to be affected include early-stage companies (including start-ups) with only 1 or 2 staff and Director-run businesses, who may have no staff costs at all if they are not paying themselves a salary. Construction and engineering firms may also find their claims are affected where they are engaged in R&D projects involving high-value consumables.
Companies subcontracting work to connected companies will be allowed to include the PAYE and NIC liabilities of the individual from those companies involved in R&D projects when calculating their cap. However, any particular PAYE and NIC liabilities cannot be included in more than on cap calculation. This means groups of companies undertaking R&D projects across multiple companies may need to consider the most beneficial approach.
It is worth noting that the smallest claims will be unaffected by the legislation, benefitting from the £20,000 threshold. There will also be no impact for companies who are still in trading profit after their R&D tax relief, whose claim value would be unaffected.