HMRC have recently announced changes to the rules for R&D tax credits for SMEs. The new rules have been designed to target perceived fraudulent claims using structures set up in the UK to claim a repayable credit even though no R&D work was actually carried out in the UK.
In order to prevent such abuse, the government has introduced a cap on the amount of the payable R&D tax credit that a qualifying loss-making company can claim. The new cap will be introduced for accounting periods beginning on or after 1 April 2021.
SME R&D tax credits to be capped
The cap will limit the payable R&D tax credit to three times the total PAYE and NIC liability of the company for the year plus £20,000. A company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap. We await confirmation from HMRC as to whether this will include any compulsory contributions paid by a connected overseas related party in the relevant country.
A company making a claim for a payable R&D tax credit of less than £20,000 will not be impacted by the cap.
Who will be impacted by the cap?
A company’s claim will also not be capped if it meets two tests. These tests require that a company’s employees are creating, preparing to create, or actively managing Intellectual Property (IP) arising from the R&D project and that its expenditure on work subcontracted to, or agency workers provided by, a related party is less than 15% of its overall R&D expenditure.
Many genuine SME claims will be affected by the introduction of the new cap. Companies that are likely to be impacted include:
- Companies who outsource large parts of their R&D projects.
- Companies where a large proportion of the R&D costs arises from consumables (eg raw materials) or software costs.
Defining active management of IP
What constitutes active management of IP is not yet clear in the draft legislation but what we do know is that a good technical assessment in the R&D process should lay the groundwork in helping build that IP picture. What’s more is that the identification and better management of IP could lead to greater utilisation of the Patent Box scheme that could deliver longer term benefit for many companies.
GovGrant have a proven track record in this area, and our IP Harvest service could become crucial for your business. This is a fixed-fee service that answers the question “Does my business have something worth patenting?” and helps you navigate your IP strategy with a focus on the commercial benefit.