The UK’s research and development (R&D) tax credits scheme has been a boon for innovation in science and technology. Nearly £2 billion is awarded to SMEs alone each year, encouraging investment in new processes, products and services.
R&D is essential to a thriving economy and any work that seeks to resolve scientific or technological uncertainty can be eligible for the scheme. The government’s intention is for spending on R&D to reach 2.4% of GDP by 2027, as a study by HMRC shows every £1 of tax that is forgone in support of innovation stimulates between £1.53 and £2.35 of additional R&D.
However, R&D tax credits have been susceptible to fraud. Nearly £300 million of fraudulent claims to the SME scheme have been detected and prevented, so the government is making changes to the system.
What is changing?
In most cases of R&D tax credit fraud, a company was set up specifically to make claims, despite undertaking no R&D. HMRC also observed cases of expenditure outside the UK being re-routed through a UK entity to gain access to the scheme.
Prior to 2012, SME claims were limited by a cap linked to pay-as-you-earn (PAYE) and National Insurance contribution (NIC) liability. The government’s October 2018 Budget announcement revealed a new limit will be introduced to tackle the problem of abusive claims. Under the new system, a loss-making company’s payable tax credit through the SME scheme will be capped at three times its PAYE and NIC liability for that year.
Will I be affected?
Most companies engaging in genuine R&D activities will not see their claims affected by the change, although it will lead to some additional administration. The cap in effect until 2012 was equal to a company’s PAYE and NIC liabilities, rather than the new version’s tripling of that figure. The intention behind the move is to deter fraudulent claims, because companies with little activity in the UK do not typically employ many people or pay a significant amount through PAYE or NICs.
Genuine companies that engage in R&D in order to overcome a well-defined technical uncertainty are unlikely to spend more than three times their PAYE and NIC liability on such activity. However, in some circumstances the cap could prove to be a problem.
Under the SME scheme, businesses can claim relief on 65% of the cost of external agency staff who are actively engaged in their R&D project. For smaller companies and start-ups, the cost of these agency workers could well exceed their own PAYE and NIC liabilities.
Do I have a say?
The government is holding a consultation on how the cap should be applied, in the hope it can keep the impact on genuine companies to a minimum. Measures it has suggested include:
- Introducing a minimum threshold, so smaller claims are unaffected;
- A limit of one ‘below threshold’ claim so companies cannot split larger claims to take advantage;
- Allowing claims to include a ‘connected’ company’s PAYE and NIC liabilities if they are subcontracted for R&D work;
- Awarding tax credits up to the level of the cap, then allowing companies to access the rest if they build up enough PAYE and NIC liability in a future year.
The consultation will run until May 24th 2019 and the new cap will be in effect for the accounting period beginning in April 2020.
How should I prepare?
R&D tax credits are a complex area. The cap the government is introducing applies to the payable tax credit, which allows loss-making SMEs to claim up to 14.5% of the R&D aspect of their losses. The result of this tax credit is an immediate cash-flow benefit, but HMRC’s steps to limit abuse of the system have created a degree of uncertainty over how claims will be administered in the future.
R&D Tax Shop are experts in assessing whether a project is eligible for the scheme and can provide advice on calculating the relevant costs for your claim. Contact us today to discuss how you can ensure your own R&D efforts qualify.
There are now as many businesses in the UK that intend to reduce investment as there are firms that plan to increase it, a new poll has indicated. As The Guardian has reported, the Institute of Direct…
UK-registered companies can now apply for a portion of £12.5 million in funding for collaborative research projects to increase domestic production of healthy and sustainable farm-based protein. The …
As businesses up and down the UK continue to face ever-greater challenges arising from a combination of escalating costs and soaring inflation, Logistics UK has urged the Chancellor of the Exchequer t…
A new report has revealed the damage that swelling costs are causing to the already crippled profit margins of UK companies, with experts issuing stark warnings on the likely consequences for the broa…
R&D tax relief claims are taking longer to process, leading to longer waiting times for companies expecting the tax relief. HMRC has been forced to take action to reduce fraudulent claims. Those p…
In a sign, perhaps, of just how perilous the economic situation remains for the whole of Europe in 2022, it has been reported that UK business confidence declined to a record low in June but still man…
New research was undertaken by a leading professional services company, and the accounting software specialist Xero has made alarming discoveries on the subject of many firms’ tendency to lose money…
As companies up and down the UK continue to struggle with escalating inflation and economic uncertainty, Chancellor of the Exchequer Rishi Sunak has been warned that time is running out to put togethe…
In common with the rest of the UK, the country’s business world has been gripped in recent days by the fast-moving events leading up to the resignation of Prime Minister Boris Johnson. Unsurprisin…
With effect from 6th July 2022, low-paid workers across the UK are getting to benefit from reduced rates of Income Tax and National Insurance. However, at least one key business leader has warned that…
On 23rd June, HM Revenue & Customs released its data concerning the ‘tax gap’ for the 2020 to 2021 tax year. The non-ministerial department said that the estimated ‘tax gap’ – defined as…
With Thursday 16th June having been National Freelancers Day, it is fascinating to see the recently released data indicating that many firms have called upon freelance skills to an even greater extent…
As a business owner, you will naturally want to make the most of all available resources and sources of support to better your firm’s survival and growth prospects. That’s just one reason why you …
Farmers in England can apply for between £25,000 and £300,000 in funding to help promote their business and increase their produce’s value. The funding is available through the new £30M Farmi…
To say that recent months have presented stern challenges for businesses would be quite the understatement – and recent research has shed greater light on precisely what keeps small-business owners …
The Plymouth Workplace Travel Grants are a part of Plymouth City Council’s Productive Plymouth Programme to promote sustainable transport measures. The grants are funded by the Department for Tr…
There was, unsurprisingly, further bad news for ‘UK plc’ in the latest Government figures, with the Office for National Statistics (ONS) revealing that the economy declined by a larger than antici…
UK registered organisations can apply for a share of up to £12 million for creative, new and improved sustainable maritime projects. This funding is from The Department for Transport. Entries open: W…