If you’re involved in claiming R&D tax credits/relief it is important to be aware of these changes to claim correctly and plan for future claim cashflow.
The latest proposed changes were announced on legislation day in July 2022, when the Government published draft clauses from the Finance Bill 2022-23. https://www.gov.uk/government/publications/research-and-development-tax-relief-changes
Requirement for new claimants to notify HMRC of intention to claim
Most changes have already been well flagged in budget statements and other government material, but there is one change that was a surprise. It will rule out new claimants making R&D claims for the past two accounting years unless they have previously notified HMRC:
- Those companies that have not made an R&D tax relief/credit claim within the last three accounting years, will be required to notify HMRC within six months of their accounting year-end that they wish to make an R&D claim.
Other changes expected to take effect from 1st April 2023
- The cost of using foreign based sub-contractors or workers will no longer be claimable except in very specific circumstances.
- An extension in the categories of qualifying expenditure to include:
- the costs of data licenses and cloud computing;
- pure mathematics as a qualifying activity.
- Claims will need to be filed digitally and include provision of an R&D cost breakdown and a brief description of the R&D (at RandDTax we already ensure a cost breakdown and description is compiled).
- All claims will have to be endorsed by a senior officer in the claimant company.
Read more here: https://www.gov.uk/government/publications/research-and-development-tax-relief-changes/research-and-development-tax-relief-reform
Re-introduction of a PAYE cap on payable R&D tax credits
A PAYE cap existed in the SME R&D scheme until 2012 when it was removed as part of a number of claimant “helpful” reforms. The recently introduced cap applies for accounting periods beginning on or after 1 April 2021.
It is part of an attempt by HMRC to prevent fraud as detailed in their policy paper “Preventing abuse of Research and Development tax relief for small and medium-sized enterprises”.
The cap limits the amount of a payable tax credit (cash payment paid against a surrendered loss). The limit is set at £20,000 plus three times the company’s Pay As You Earn (PAYE) and National Insurance Contributions (NICs) made in the relevant R&D claim year. The cap does not prevent a claim it just potentially restricts one avenue of benefit. A £20,000 R&D Tax Credit is a significant amount of money for many small SMEs even if they are capped.
The cap only impacts companies that after the R&D deduction (130% of qualifying R&D expenditure) are in a loss-making position and want to claim a payable R&D tax credit (e.g. because they have no available carry-back or carry-forward of losses to offset taxes in adjacent years, which is preferable when possible). If a claim is capped the losses created by the claim, but not surrendered, can still be carried forward for future tax relief. Tax relief at current rates is worth 4.5% more than surrendering losses for R&D Tax Credits but such a benefit depends on sufficient future profits to use the relief against.
There is an exemption available, to the cap on R&D Tax Credits, if certain conditions around developing or controlling intellectual property (IP) are met. This is a tough test and it will never be passed if a company has no employees, as employees must be engaged in the IP activities.
See HMRC guidance here: https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird90600
Due to the cap, PAYE and NIC figures are needed for all R&D claims.
The amount of relevant payroll taxes for calculating the cap is:
The amount of income tax due under PAYE regulations + Employers National insurance + Employees National insurance – Employers’ Allowance (this equals the amount paid to HMRC) + any benefits paid out by the company such as sick pay or maternity/paternity leave.
If there are connected companies involved in the R&D e.g. providing workers or subcontractors to the claimant company, the calculation of the cap can also include relevant PAYE and NIC relating to these workers/subcontractors.
Get in touch to discuss how the changes may impact your claims.
Linda Eziquiel – Regional Director RandDTax.