Changes to R&D tax relief from 1st April 2021 - yes really!

From 1^st April 2021 there will be changes to the R&D tax credit regime for SMEs.

These changes have been designed to reduce fraud and abuse and will take the form of a ‘cap’ on the value of the tax credit which can be claimed.  The cap will apply to accounting periods which begin before, and end on or after, 1^st April 2021. Where an accounting period spans the 1^st April 2021 then claims will need to be split between to the pre-cap and post-cap rules.

Changes

• Under the new rules, the amount of payable R&D tax credit an SME can claim is limited to £20,000 plus 300% of its total PAYE and National Insurance contributions (NICs) liability for the period.
• Companies claiming below £20,000 will be unaffected, this is to ensure small businesses who truly need funding do not face the restrictions.
• When calculating the cap, businesses will be able to include related party PAYE & NIC liabilities attributable to the R&D project.
• There is a provision to prevent any PAYE or NIC liabilities counting towards more than one company’s cap, which is classed as ‘double counting’.
• A company is exempt from the cap if it meets these two key tests;
  1. The company’s employees are creating, preparing to create or managing intellectual property (IP).
  2. Less than 15 % of its R&D qualifying expenditure is spent with connected persons.
• These tests are designed to exempt those with low PAYE and NIC, but are nevertheless engaged in genuine and substantial R&D.

Example

R&D Limited has a tax adjusted loss, before any claim for R&D tax credits, for the year ended 31 March of £100,000.  In the year, their qualifying R&D expenditure is £100,000 (Uplifted to £130,000 for tax adjustment purposes). They do not meet the criteria of the cap exemption tests.

• Prior to 1^st April 2021, the tax credit they could claim would have been £100,000 + £130,000 = £230,000 x 14.5% = £33,350
• After 1^st April 2021, we need to take account of the total PAYE & NI liability for the claim period.

For this example, the total PAYE & NI liability for the period’s £4,000. This would mean the maximum tax credit claimable would be £20,000 + (£4,000 x 300%) = £32,000

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