Changes to the R&D Tax Credit Rules
This year there will be a new cap on SME R&D tax credits, affecting companies that usually receive a cash credit. The cap will be set at three times a company's PAYE/NIC bill, with a ￡20,000 buffer.
The changes are intended to reduce abuse of the scheme and prevent fraud; they were originally planned for April 2020 but were pushed back due to the impact of Covid-19.
From 1 April 2021:
- The amount of cash credit that a loss-making company can receive through SME R&D tax relief will be capped at three times their PAYE and NIC liability plus ￡20,000.
- Claims based on tax years ending before April 2021 will not be affected. If the tax year straddles this date (as it will for most), an apportionment will need to be made, applying the old rules to the previous accounting period and the new rules to the new accounting period.
- There will be a ￡20,000 minimum claim threshold below which the cap will not apply. Therefore a company making a small claim for payable credit below ￡20,000 will not be affected by the cap.
- The large company scheme ('RDEC') in unaffected by the cap. As are companies that receive their SME R&D relief by way of a reduced corporation tax bill.
- 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.
- Businesses will be exempt where a two-stage test is met:
- The company's employees are creating, preparing to create or actively managing intellectual property, and
- the company's expenditure on work subcontracted to, or EWPs provided by, a related party is less than 15% of the total R&D expenditure of the company.
Some examples which may help contextualise these changes:
App development startup with sole founder/shareholder
The founder pays herself a minimum salary and takes the rest of her income through dividends. She spends 60% of her time on R&D and the rest on sales and marketing.
Calcs: Annual PAYE bill is nil; buffer of ￡20,000 kicks in.
Result: Unaffected by the changes as the company's R&D claim will be within the ￡20,000 buffer.
Established software house run from UK but with an overseas dev team
The company has a team of 9 developers based in the Ukraine who invoice on a monthly basis for their services. There is a small UK team of 2 on payroll with salaries of ￡25k each who manage sales and admin. The Ukraine team are paid ￡270k in total per year and spend 95% of their time on R&D.
Calcs: Annual PAYE/NIC bill of ￡14k, R&D cap is therefore ￡62k. R&D cash credit of around ￡50k each year.
Result: Unaffected by the changes, but only just. Even though the PAYE/NIC bill is low, once multiplied by 3 and with the additional ￡25k it covers the usual R&D cash credit of ￡50k.
Tech scale-up with 60+ employees
Fast growing tech scale-up with half of their employees on UK payroll (gross salaries of ￡2,000,000), the remaining employees are overseas contractors costing ￡1,500,000 in total each year. The business is heavily R&D focussed and most of the R&D is conducted overseas.
Calcs: Annual PAYE/NIC bill of ￡900,000. R&D cap is therefore ￡2,720,000. Usual R&D credit is around ￡500,000.
Result: Unlikely to be affected by the changes as three times the UK PAYE/NIC bill more than covers the R&D cash credit. The location of where the R&D is conducted does not affect the cap.
Each company's affairs will of course be more nuanced than the examples provided above but they should hopefully provide you with a steer as to whether you need to seek advice and/or implement changes.
As ever, if you need some help or would like to understand how these changes could impact your R&D claim please get in touch.