Details of the relief
R&D tax relief supports companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.
Companies can claim Corporation Tax relief if their project meets HMRC’s definition of R&D.
See article R&D Tax Relief for more details of how the scheme works, what exactly qualifies, and how to claim.
For SMEs, R&D tax relief has become much more generous in the last few years, with the total tax relief increasing to 230% from 1 April 2015.
For companies not paying corporation tax (i.e. loss-making companies) there is also the opportunity to claim cash back from HMRC, at a very generous 14.5% of the enhanced expenditure.
In the past, there were PAYE/NIC cap restrictions applied to this valuable cash source. These restrictions were removed from 1 April 2012.
This relief is very beneficial, giving a potential benefit for loss making companies of up to 33.35p for every £1 of eligible R&D spend (230% enhanced deduction x 14.5% cash repayment).
What’s staying the same?
The Chancellor announced during his Budget speech on 29 October 2018 that the main rates attaching to the tax relief available on qualifying research and development have been frozen until the end of the 2020/21 tax year.
Qualifying R&D expenditure falling within the SME regime will continue to be enhanced by 130% meaning companies will be able to obtain tax relief on £23,000 for every £10,000 they spend on R&D.
Loss-making SMEs will also still be able to exchange losses attributable to R&D for a tax credit at a rate of 14.5%.
What’s changing?
The Chancellor also announced a forthcoming restriction to limit the amount of payable tax credit that can be claimed by a company under the R&D SME tax relief.
The limit will be set at three times the company’s total Pay As You Earn (PAYE) and National Insurance Contribution (NICs) payment for the period.
The change will only have effect for accounting periods beginning on or after 1 April 2020.
Any loss that a company cannot surrender for a payable credit can be carried forward and used against future profits.
The announced change has been introduced in order to prevent abuse of the R&D tax relief for SMEs by the use of artificial corporate structures using companies to claim the payable credit, even though they have no legitimate R&D activity. Another stated concern is the use of structures set up to claim the payable tax credit despite having little or no employment or activity in the UK.
Unfortunately, this may have a negative impact on some legitimate businesses. However, as this new change will not come into force until April 2020, companies have time and can plan accordingly. They could consider employing people rather than relying on the input of the owner/directors or the use of subcontractor input, to try and help boost the tax relief they will receive from April 2020 onwards.
Farley Kaye FCA
Managing Partner
For more information please contact Farley:
farley.kaye@fkgb.co.uk
052 627 7472
