The R&D scheme allows a company undertaking qualifying activity to claim a payable R&D tax credit if after the R&D enhanced deduction they are making a loss in the year concerned. Losses can then be surrendered for a tax credit on the basis of the lower of the post R&D deduction loss and the R&D enhanced expenditure (qualifying costs * 230% at present) at a rate currently of 14.5% for a cash credit.
The Chancellor announced the following proposed change to the R&D scheme in the Budget 2018.
2.17. Preventing abuse of the Research and Development(R&D) tax
relief for small and medium- sized enterprises (SME)
As announced at Budget 2018, Finance Bill 2019-20 will introduce a limit on the
amount of payable tax credit that can be claimed by a company under the R&D SME
tax relief. The limit will be set at three times the company’s total PAYE and National
Insurance contribution (NICs) payment for the period. The change will have effect for
accounting periods beginning on or after 1 April 2020. Any loss that a company
cannot surrender for a payable credit can be carried forward and used against future
profits. We will consult on this change.
A cap on the value of a payable R&D Tax Credit linked to PAYE was previously removed in 2012 by a Conservative Government. This was regarded as a good move in terms of improving access to funding in particular for start ups. This reintroduction is more generous than the previous cap and is proposed to be 3 times company PAYE plus NIC.
It will impact some start ups and other companies that use Externally Provided Workers and Subcontractors for R&D and don’t have much in terms of payroll, preferring these more flexible approaches to doing R&D.
We can see a few approaches to mitigate any impact of this change for those effected and will discuss these with our clients. We will also start monitoring the level of the potential cap and identify how it might impact future claims before it comes into force so that any company impacted is aware of the potential cash flow impact.
If you need help with this or any other R&D related issue please contact us today.
Chris Toms, Compliance Director RandDTax