From 1st 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, 1st April 2021. Where an accounting period spans the 1st April 2021 then claims will need to be split between to the pre-cap and post-cap rules.
- 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;
- The company’s employees are creating, preparing to create or managing intellectual property (IP).
- 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.
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 1st April 2021, the tax credit they could claim would have been £100,000 + £130,000 = £230,000 x 14.5% = £33,350
- After 1st 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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