Proposed changes to the payable R&D SME tax credit

A company which claims R&D relief as a SME can surrender its R&D losses in exchange for an R&D tax credit, at 14.5% of the surrendered loss.  This can be a real advantage to start-ups and innovative small businesses as the credit can be a real boost to their cash flow position.

In the November 2018 budget, the government announced the introduction of a new anti-abuse cap to the SME payable tax credit scheme.  From 1 April 2020 the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NIC liability for that year. 

This cap has been designed, in HMRC’s words, ‘to deter abuse from fraudulent companies and those where the UK activities amount to little more than claiming the payable tax credit’; however there is concern that this cap could have a negative effect on genuine companies undertaking Research and Development.   In particular it will affect companies who for genuine reasons use subcontractors and externally provided workers (e.g. agency staff) to assist them with their R&D projects.

Following this announcement, a consultation document was issued in March 2019 inviting comments on how the proposed cap will be applied, to minimise any impact on genuine businesses, before it is legislated in the next Finance Bill.  This consultation closed at the end of May and we are awaiting HMRC’s publication of the outcomes of the public feedback to see how they expect the cap to work in practice.

If you have are concerns that your R&D claim could be affected by the proposed cap, please contact Jenny Trunks