In the 2018 Autumn budget, the government proposed a new R&D tax credit cap for loss-making small and medium-sized enterprises (SMEs).
With time ticking-down until this change is set to come into effect on 1st April 2020, here’s a quick and easy-read for accountants about what they need to know about how this could affect their clients claiming valuable R&D tax credits.
Why is the change being planned?
According to HMRC, since the introduction of the R&D tax relief scheme, over £300 million in fraudulent claims have been identified and prevented. In these cases, companies were simply set up to claim money through the scheme, even though they were engaged in no legitimate R&D activity.
To prevent such fraudulent claims, the government has announced plans to reintroduce a PAYE and NIC cap on benefits for SMEs, which was originally abolished in 2012. The reintroduction of the cap would mean that from April next year, loss-making SMEs will be able to claim tax credits worth a maximum of three times the company’s PAYE and NICs liability for that year. Therefor if your company has found to be making a loss on a failed innovative product or research then you can still claim.
How will the planned cap affect SMEs?
From April 2020, the way in which companies resource their businesses could have an impact on the number of payable tax credits they are entitled to.
Under the current rules, the payable R&D tax credit is not affected by whether SMEs spend money on staff or subcontractors. However, if the cap is reintroduced next year, it’d mean that a business spending more on subcontractors than staff, would be entitled to claim less tax credits. This is because the SME is not covering the PAYE or NICs of subcontractor employees.
With this in mind, it might be worth companies reconsidering the possible benefits of employing R&D staff versus the costs of subcontracting these services. Similarly, business owners may also want to think about which is more beneficial; the personal tax efficiencies of paying themselves dividends or increasing their salary and potentially being eligible for higher value R&D tax credits.
The government claims that close to 95% of companies currently claiming the payable credit will be unaffected by this planned change. However, the new rule can be complex and is likely to spur questions from company owners looking to understand how their businesses could be affected.
Accountants can use this proposed change as an opportunity to engage SMEs seeking routes to growth. With the right expertise, they can help qualifying companies to claim tens or hundreds of thousands of pounds in genuine R&D tax credits.
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