In the 2018 Budget, the government proposed a cap on R&D Tax Credits for SMEs, with plans for it to come into effect for accounting periods commencing on or after 1 April 2020. Ian Batkin, one of our founding partners and R&D tax specialists, explains all you need to know about the new R&D tax credit cap, and some of the issues it poses.
R&D Tax Credits provided UK businesses with around £3.5bn of tax relief in 2016/17. This is clearly a significant increase from the approximate £350m figure in 2010. The number is particularly remarkable when you consider that R&D Tax Credits is being massively underclaimed in overall terms, with less than 10 percent of SME’s who could potentially claim actually having done so to date. HMRC has stated that this increase has unfortunately also resulted in fraudulent claims to the tune of £300m, as a consequence of companies with ‘artificial corporate structures’ making claims.
What is the R&D Tax Credit cap?
In the 2018 budget, the government announced that a cap will be introduced in April 2020 in a bid to combat these fraudulent claims. It stated:
“To help prevent abuse of the research and development (R&D) SME tax relief by artificial corporate structures, the amount that a loss-making company can receive in R&D Tax Credits will be capped at three times its total Pay As You Earn (PAYE) and National Insurance Contributions (NICs) liability.”
How will it work?
The idea is that an R&D Tax Credit cap will make the situation more difficult for companies being set up purely with the intention of claiming the cash available through the R&D Tax Credits, despite having no legitimate R&D activity. HMRC has also identified cases of structures set up deliberately to claim the payable tax credit by companies that have no or little employment or activity in the UK. The Treasury has noted that the R&D Tax Credit cap will deter abuse as these types of fraudulent companies typically do not employ many people or pay PAYE and NICs.
When announced, the new cap immediately fuelled fears that it would hinder legitimate start-ups and small businesses from receiving R&D tax benefits. It is appreciated that HMRC needs to reduce fraudulent claims, but it should also ensure that genuine research and development businesses and activities are not penalised in the resultant legislation. Many quickly noted that start-ups are often loss-makers, having low or nil salary costs as they rely on subcontractors and/or many directors taking no remuneration in the early days of starting up a business. These new businesses could not claim R&D Tax Credits if the cap is put in place, as they’d pay nil PAYE or NICs liability (and three times nil is nil).
A consultation period was announced after a significant number of businesses voiced these concerns. The consultation document states that the Treasury is aware of the issues and concerns put forward and hopes to keep any impact on new loss-making SME’s to a minimum.
HMRC has put forward a compromise in the consultation that there would be a minimum level they would pay up to before the cap applies. Although precisely what that level will be has not been officially stated and the fear that some businesses will still be unfairly caught out remains.
We await the official outcome from the consultation (which closed in May 2019) and, more importantly, what changes will take effect (presumably still) from April 2020.
Get in touch
Luvo Financial, which is based near Wolverhampton, works with businesses and independent accountancy practices across the Midlands and elsewhere in the UK. Luvo was founded in 2015 by partners Ian Batkin and Vicki White, who are both qualified accountants.