LEGISLATION introduced to tackle the abuse of Research and Development (R&D) tax relief claims, which inadvertently affected genuine claims from small businesses, is being amended.
In today’s tax brief, Shipleys Tax looks at the new proposed changes to R&D rules and suggests why it’s good news for SME’s looking to get tax relief on research expenditure.
For a general overview of R&D and its abuse see: https://www.shipleystax.com/2020/09/beware-of-unscrupulous-rd-tax-relief-claim-companies/
Under the UK R&D tax credit relief rules, R&D costs incurred for work done anywhere in the world can potentially qualify for R&D tax relief. This is a very generous aspect of the tax relief but one that was open to widespread abuse.
For example, companies outside the UK with no real business interests in the UK, would set up UK companies and run foreign R&D costs through the company only to obtain the refundable/payable R&D tax credit from HMRC. HMRC state they have identified approximately £300M in fraudulent claims.
In order to prevent this abuse, draft legislation was introduced whereby any payable R&D tax credit would be capped at three times the PAYE costs incurred (thereby limiting the claim).
One of the major problems with this cap was an unintended result to deny or substantially reduce the R&D tax credit payable for certain SMEs; in particular start-ups. In many cases, start-ups tend to engage staff on a contract basis as opposed to employee/PAYE basis for various reasons. This would mean a low PAYE base cost.
As such, you could have the situation where a start-up has one employee on a reduced salary (because the company is “bootstrapping”) and hiring R&D staff on a contract basis. For example, if the PAYE were £5,000, the payroll cap would be £15,000 and hence any payable tax credit over this amount would be denied even if the qualifying expenditure was much higher. With the average SME receiving over £55K in tax credits, this could result in a substantial reduction, or denial, of R&D tax credit relief.
Under new draft legislation however, these restrictions have been lifted and there are now two exceptions to the rule above.
Firstly, any payable R&D tax credit below £20K is not affected by the cap. Secondly, and more importantly, any SME will not be subject to the cap if:
- its employees created the intellectual property behind the R&D work and
- its expenditure on externally provided workers (and work subcontracted to a related party) is less than 15% of its overall R&D spend.
Currently the legislation is draft and, if passed, is welcome news to SMEs in the UK. In particular it would benefit those startups with very low PAYE costs and hand them a cash boost when it’s needed most.
The new legislation is expected to apply to accounting periods on or after 1 April 2021.
To talk through your potential R&D claim and how our team of experts might be able to help, please call 0114 272 4984 or email firstname.lastname@example.org.