Towards the end of 2020, draft legislation confirmed the introduction of a new cap that aims to reduce the number of fraudulent claims for Research and Development (R&D) tax credits, by small and medium-sized enterprises (SMEs).
The new cap will limit the payable R&D tax credit that a qualifying loss-making company can claim for an accounting period. The payable amount will be £20,000 plus 300 per cent of its total PAYE and National Insurance Contribution (NIC) liabilities within that period.
These liabilities include those of connected persons who undertake subcontracted R&D for the company or those that provide workers for the company.
However, businesses are exempt from the cap if they meet the following criteria:
- Their employees are creating, preparing to produce or managing intellectual property (IP)
- They do not spend more than 15 per cent of their qualifying R&D expenditure on subcontracting R&D (this percentage is an increase from 10 per cent, which was initially proposed in the March 2020 consultation document)
These measures will be included in the Finance Bill 2021 and the cap will apply to accounting periods from 1 April 2021.
Even though the cap aims to reduce fraudulent claims, there are worries that it might affect some businesses that do genuine R&D activities and projects, particularly those that are heavily reliant on outsourced expertise or workers, such as the IT and tech sectors.
Another concern is that the requirement to document IP activity might create higher compliance and professional costs for SMEs.
Additionally, the Institute of Chartered Accountants in England and Wales, recommends the following amendments:
- Reduce the scope for the measure to be abused through non-payment of PAYE & NIC liabilities
- Clarify and simplify the intellectual property exception by the inclusion of a purpose test
Currently, there are no changes to the legislation since the above suggestions were issued on 6 January 2021.
However, working out these tax credits can be difficult. Therefore, it is best to consult with an expert, such as our team at Kapitalise, who can secure R&D tax credits for your business.
To find out if your innovative business or project can take advantage of R&D tax credits or relief, contact our expert team today.