Businesses should review the cash-flow impact of the reintroduced cap on payable SME tax credits
From 1 April 2021, small and medium-sized enterprises (SMEs) considering making a research and development (R&D) tax relief claim will need to carefully consider the impact of a new cap on payable tax credits.
The amount of any payable R&D tax credit a company may receive under the SME scheme will be capped at £20,000, plus three times its relevant PAYE and National Insurance contributions (NICs) liabilities for the period.
A company is exempt from the cap if:
- its employees are creating, preparing to create or performing management activity in relation to relevant intellectual property (IP), and
- it does not spend more than 15 per cent of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons (or those who are, by election, treated as connected persons).
In the original draft legislation, the meaning of â€˜IP' was fairly tightly defined, as â€˜any patent, trade mark, registered design, copyright, design right, performer's right or plant breeder's rightâ€¦' - notable by its absence was any reference to â€˜know-how' or IP that a business chooses not to publish or formally register.
In a welcome announcement on Budget day, HMRC confirmed that they would widen the definition to include know-how and trade secrets, to cover cases where companies are not able to, or do not wish to, obtain legal protection in respect of the results of their R&D.
For companies with accounting periods straddling the 1 April 2021 commencement date of the new legislation, it has also been confirmed that the measure will not apply to the part of the period falling after that date. Instead, it will only affect the next full accounting period starting after 1 April 2021. This is another welcome change from the previously published draft legislation, giving affected companies time to plan for any cash flow impact arising from the changes.
How will this affect my business?
This measure was introduced by the Government as a means to counter specific, high value abuses of the R&D tax relief regime, and HMRC has in recent months stated that fraud in excess of £300m had been perpetrated.
For many who have been involved with R&D tax credits for many years, it will bring back memories of a previous cap that was repealed in 2012. In truth, this cap is more generous, calculated at 300 per cent (as opposed to 100 per cent) of the amounts for which the company is required to account to HMRC in respect of PAYE income tax and NICs. In addition, companies will be able to include the relevant PAYE and NIC liabilities of connected companies, to the extent that they relate to employees that are involved in the R&D activity through EPW or subcontractor arrangements.
Whilst it has always been HMRC's stated aim to minimise the impact of the new cap on â€˜genuine claimants', and some of the relaxations and exemptions described above are helpful in this regard, we still believe that many businesses that carry out genuine R&D will be impacted.
If you would like more information on these changes, or to discuss the impact on your company's claims, please contact Sheetal Sanghvi.