HMRC recently published draft tax legislation that includes confirmation of the R&D scheme PAYE/NIC cap. The changes to R&D SME tax relief will be legislated in Finance Bill 2021 and will be effective for accounting periods beginning on or after 1 April 2021.
Where a company has an accounting period beginning before, and ending on or after that date, they will be treated as two separate periods and the cap will apply to the period from 1 April 2021.
As you may recall from our previous blog on this topic, HMRC brought this legislation in to combat abuse of the generous SME R&D scheme. Abuse that involved, in some cases, companies setting up some form of corporate entity in the UK, with little or no substance, simply to access the relief.
It was first mentioned in the 2018 Budget, when a cap was set for the SME payable R&D tax credit at 300% of a company’s PAYE/NIC liability.
It’s gone through a few consultation processes since then, primarily to make sure genuine claimant companies aren’t prevented from claiming. And now, the government is confirming the design of the PAYE cap will include the following features:
- A company making a small claim for payable credit below £20,000 will not be affected by the cap.
- A company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap, and these will be subject to the 300% multiplier.
- A company’s claim, of any size, will be uncapped if it meets two tests:
1) That its employees are creating, preparing to create, or actively managing intellectual property (IP); and
2) That its expenditure on work subcontracted to, or externally provided workers from, a related party is less than 15% of its overall R&D expenditure. The ‘related party’ angle is the key defence against artificial structures here, as that’s how it was being done in terms of costs flow.
A BIG STEP IN THE RIGHT DIRECTION
Over the last couple of years, there has been a reduction in the quality of claims as the market has become flooded with so-called “experts”. So, as one of only five R&D advisers in the UK invited to help prepare the Chartered Institute of Tax’s own guidance regarding R&D advisers and how to raise standards in the industry (issued 1 June 2020), we welcome this news with open arms.
Anything that helps protect the integrity of the relief and ensures only genuine claimant companies are helped by the scheme funds, has to be a good thing.