It was widely expected that the Chancellor might use this Budget to boost investment, ahead of leaving the EU, with some positive changes to the R&D tax relief schemes. During the Budget speech, Chancellor Philip Hammond said that their intention is to invest 2.4% of GDP into R&D by 2027. He also committed £12m specifically for innovative technology in the fishing industry and an additional £1.6bn for the government’s modern industrial strategy. But what about R&D Tax Credits?
The small but important change to R&D Tax Credits was not included in among all the other announcements in the Chancellor’s Budget Speech, but is written in the Budget document itself.
New (old) PAYE and NICs cap to R&D Tax Credits
Section 4.19 of the Budget document is called Avoidance, Evasion and Unfair Outcomes. We find the specific change to the R&D Tax Credit scheme in here. It states that a loss making company will only be able to receive payable tax credit up to three times its PAYE and NICs total.
This has previously been part of R&D regulations and was abolished in 2012. Its new incarnation will begin in April 2020 and it is more generous this time around.
Why is this change being made to R&D tax credits?
As demonstrated by its position within the Budget document, this is a fraud prevention exercise.
The Budget note explains: “HMRC has identified (and prevented) fraud attempts on the SME payable tax credit, worth £300 million in total. In these cases, companies were set up to claim the cash available through the payable credit even though they have no legitimate R&D activity. HMRC also identified structures set up deliberately to claim the payable tax credit despite having no or little employment or activity in the UK.” Basically, the criminal behaviour of few has spoiled it for everyone.
The government feels that this preventative measure will shut down potential fraudsters because they don’t usually pay any tax on their ill-gotten gains (NICs and PAYE). They are also unlikely to officially have many employees.
What effect will the NICs and PAYE cap have on R&D tax credit applications?
According to the Budget note: “Close to 95% of companies currently claiming the payable credit will be unaffected.” But there is concern on two fronts.
Firstly, this is not helping to address the complexity of the R&D tax credit claims system. Any changes or extra elements only complicate matters further.
Secondly, it could negatively impact new businesses that simply don’t employ many people. As reported in Accountingweb, Mark TIghe (CEO of Catax) said: “This anti-avoidance rule will impact genuine claims made by technology start-ups where their payroll costs are low.”
The government has foreseen this problem saying: “the government recognises that some genuine companies with UK R&D activity may have low PAYE and NICs liability relative to R&D spend and therefore could be affected by this measure, despite the cap being set at three times their liability. In these cases, the companies will still be able to claim payable credit up to the cap with any unused losses carried forward to be set against future profits. The government will also consult on how the cap will be applied, to minimise any impact on genuine UK businesses.”
In 2016-17, R&D tax credit claims totalled £1.8bn. In 2010 this figure was only £350m. Through our clients, we see the huge impact R&D tax relief has on their investment in innovation. It remains an amazing tax relief, no matter what size of company you have. Given that only 5% of claims are going to be affected by this NICs and PAYE cap, it is essential that we keep spreading the word to all businesses that are entitled to R&D tax credits. If you would like to discuss the potential of your R&D tax credit claim, give us a call on 0330 0539 112.