HMRC’s 2020 SME PAYE cap will stop the flow of fraudulent R&D tax relief claims. But could it affect your business too?
The R&D tax incentive scheme offers cash incentives where companies invest in Research & Development (R&D). Since the scheme’s introduction in 2000, the government have paid out £26.9 bn to UK companies, and it’s proved to be hugely beneficial to innovative Small & Medium Enterprises (SMEs) in particular.
These smaller companies – often in a start-up position – arguably need the cash the most, as their investment in R&D poses a higher risk than their larger, more established counterparts. The good news is that HMRC are continuing to support this valuable relief as a key driver of innovation in UK companies.
Great, so what’s changing?
Claimants will know that where the company is generating a tax loss (which is common in early years of trading), it may surrender the loss to claim a cash credit which is worth up to 33% of their expenditure on R&D.
Unfortunately, there have been fraudulent claims using artificial structures, and now HMRC want to stop them by introducing an anti-avoidance measure to cap the payment of a tax credit to three times the company’s PAYE and NIC liability for the claim period. The cap will be imposed for companies with financial periods beginning after 1 April 2020. This measure won’t affect companies who are purely claiming a reduction in payable corporation tax and not claiming the tax credit.
Unintended casualties – could it be you?
A major category of qualifying expenditure for R&D incentives relief is salary costs, and the new PAYE cap is designed to ensure R&D is being carried out in the UK by companies with genuine employees.
However, many companies within the biotech / pharmaceutical or information technology industries may not have the capacity to employ individuals to carry out specialist R&D, subcontracting elements of this work instead. This means that these types of businesses may well fall foul of the new cap, by having low PAYE/NIC costs. Cash strapped start-up companies where founder members are initially drawing low salaries (and using subcontractors) could also be caught, too.
HMRC have contended that the cap is designed to be an anti-avoidance measure only and is not being imposed to prevent genuine claimants from benefiting.
The precise details of the amendment are being ironed out at the moment, but we expect they may include the following changes:
- A lower claim threshold, beneath which the cap will not be imposed.
- Consideration of the claimant’s wider group’s PAYE / NIC liabilities.
- Ability to ‘roll forward’ any unpaid tax credit to a future period where PAYE/ NIC liabilities reach the required level.
What can you do now?
If your business has a low number of employees and is largely operating using subcontractors, this cap may affect your ability to claim a repayable tax credit. Our R&D team will tell you whether that’s the case and advise on possible remedies. To find out more and arrange a chat, you can contact Rebecca Prince at firstname.lastname@example.org