The somewhat unexpected change in R&D Tax relief under the SME scheme announced by the Chancellor in his Autumn Budget, is something of a ‘back to the future’ step. In our latest blog, Luvo’s Ian Batkin takes a closer look at these changes and what qualifying SMEs need to know about them, as well as his round-up of the other main tax changes.
The largest proportion of R&D Tax Credits, Capital Allowances and Patent Box claims that Luvo support are those made by family-owned / owner-managed SME businesses. SME’s represent the heartbeat of the economy, creating a very significant number of jobs, wealth and let’s not forget ‘tax take’ across the UK, so it’s important to investigate the impact on them specifically of a number of announcements in the Autumn Budget.
The Chancellor’s Budget announcement signals a move by the government to clamp down on R&D tax credit claims by some SMEs by reintroducing a PAYE/NIC limit on cashback payments received.
This cap was removed some time ago (for accounting periods ending on or after 1 April 2012) but has been reintroduced from April 2020, albeit at 3 times total PAYE and NICs liability. It’s said that 95% of claimants will be unaffected but clearly this will need to be looked at closely if you have a high level of external costs (sub-contracted or agency staff) compared to internal staff (such as happens often in the IT sector).
Consultations will be carried out ahead of implementation to ensure that impacts are minimised.
Despite on the one hand re-confirming the government’s commitment to raise total investment in R&D to 2.4% of GDP by 2027, the Chancellor couldn’t resist including a subsequent and somewhat typical ‘sting in the tail’ with this reintroduction of a PAYE restriction on those SME’s looking to claim Payable Cash Credits when making R&D Tax claims, which implies that some lossmaking businesses without employees will be unable to recover their R&D investment.
In addition to the substantial increase in R&D Tax Credits’ claims in 2016/17, HMRC also identified about £300m of fraudulent claims by ‘artificial corporate structures’ and, consequently, the change from April 2020 means that the amount that a loss-making company can receive in Payable Tax Credits will be capped at three times its total PAYE and NIC’s liability
The aim of preventing abuse is undoubtedly admirable, particularly as the Treasury noted that some entities had been set-up specifically to claim the Payable Credit without employing anyone or undertaking R&D activity in the UK.
There’s unfortunately a ‘déjà vu’ element to this proposed ‘ghost tax’ measure, with a similar restriction being abandoned in 2012 which was previously believed to have encouraged the reasonably significant year-on-year increase in claims by SME’s – it’s hoped that the opposite won’t happen now.
We will continue to identify approaches to mitigate the impact of this proposed change, will discuss this further with the very small number of our clients who would be affected by this (including ways to possibly mitigate it), and will participate in the consultation process as much as we are allowed.
· A new Structures and Buildings Allowance (SBA’s) was introduced, which provides for tax relief on the cost of certain non-residential structures and buildings incurred on or after 29/10/18 – specifically this allows relief on the cost of construction of commercial premises, held for the purposes of a wide range of businesses, providing that these businesses are within the charge to UK tax (even if the building in question is located outside the UK). Relieved costs include the direct cost of bringing the building or structure into existence, including costs of converting an existing building, demolition and land alterations; allowances are only given once the building is brought into use. Since Industrial Buildings Allowances (IBA’s) were phased out in 2011, relief has not been allowed in respect of expenditure on structures or buildings; SBA’s will be allowed on a straight-line basis at 2% rate (with the cost of qualifying buildings therefore being amortised over 50 years for tax purposes); unlike IBA’s, SBA’s will not result in a balancing allowance or charge when the building is sold, because unexpired SBA’s simply pass on to the purchaser.
· Integral features of buildings e.g. water and ventilation systems, have only been eligible for capital allowance claims at a reduced annual / ‘special rate’ of 8%, rather than the more normal / ‘general rate’ of 18%. Somewhat surprisingly / disappointingly, with effect from April 2019, this ‘special rate’ will reduce to 6%.
· The Annual Investment Allowance (AIA) is effectively a 100% capital allowance that can be claimed up to a certain amount of plant and machinery capital expenditure (excluding cars) each year, irrespective of whether that expenditure qualifies for capital allowances at the ‘special rate’ or ‘general rate’. It was announced that for a temporary two year period from the 1st January 2019, the AIA will increase to £1million per annum (currently £200k p.a.), which is potentially quite a positive change for SME’s. It should be noted however, that this AIA will be unavailable in respect of expenditure that would otherwise qualify for the new SBA’s.
· One of the biggest, and in all honesty, widely anticipated inclusions in the Budget was the extension of the so-called ‘IR35’ off-payroll worker rules to the private sector.
Effective from April 2020, the changes affect workers who provide and invoice for their services via Personal Service Companies. This could have a very significant impact in various business communities across the UK, including Scotland, as certain sectors rely heavily on contingent and flexible workforces, and is likely to mean that many of these workers will need to be paid as employees through payroll in future.
The good news for some SME’s though is that these new rules will not apply to ‘small businesses’ (expected to be defined as companies with less than 50 employees, as per the Companies Act definition) and as such many SME’s will fall outside the scope of this new law, at least initially anyway.
Entrepreneurs Relief (ER):
· ER reduces the capital gains tax rate from 20% to 10% when selling their business, and represents a really valuable relief for entrepreneurs.
Entrepreneurs must be aware that:
(1) The must be involved in the business for at least 2 years to claim the relief (was previously only 1 year); this comes into effect from April 2019 and although clearly not affecting long-term business owners, will mean that shareholders looking to sell their shares may need to hold them for longer to ensure compliance with this
(2) Shareholders must have a minimum 5% interest in both distributable profits and net assets (not just 5% of voting rights and equity, as previously); this came into effect from 29/10/18 and owners of businesses should therefore check their actual position, to ensure compliance with this new requirement
(3) As previously announced, the 2018/19 Finance Bill will allow shareholders whose holding dilutes below the 5% threshold, to still qualify for ER in some pre-determined circumstances
As is often the case, the devil may well be in the detail when these changes are actually included in legislation, so affected SME’s need to be aware of what was announced but also check what’s actually confirmed when these come into effect.
Luvo works predominantly for small and medium sized businesses in a wide variety of industry and market sectors, and also delivers specialist R&D Tax, Patent Box and Capital Allowances advice and claims support to numerous independent accountancy firms and practices. Luvo work on a contingent basis and nothing is charged for any initial discussions or support until an engagement is fully agreed. The firm’s team has achieved a 100% success record in making claims for its clients.