Budget 2018: R&D tax credit cap returns from the dead
Chancellor Philip Hammond delivered a mixed Budget day package on support for research and development.
On the one hand, proclaiming the government’s commitment to raise total R&D investment to 2.4% of GDP by 2027 the Budget report touted an extra £1.6bn for its modern industrial strategy. Even the fishing industry got in on the act, with the Chancellor promising £12m during his speech for “cutting-edge technology” to support monitoring and safety.
But following along later was a little sting in the shape of a PAYE restriction on those making R&D tax credit claims.
R&D tax credits resulted in £1.8bn worth of claims in 2016-17, up significantly from the £350m claimed in 2010.
But HMRC identified £300m in frauds claimed by “artificial corporate structures”. As a result, from April 2020 the amount that a loss-making company can receive in R&D tax credits will be capped at three times its total Pay As You Earn (PAYE) and National Insurance contributions (NICs) liability.
The Treasury briefing note on the policy noted that in some instances, entities were set up specifically to claim the R&D credit without employing anyone or carrying out activity in the UK.
“Close to 95% of companies currently claiming the payable credit will be unaffected,” the Treasury said in its Budget note.
Consultations will be carried out ahead of implementation to ensure that the impacts are minimised and those caught by the restriction will still be able to claim payable credits up to the cap with any unused losses carried forward to be set against future profits.
This appears to be another of Philip Hammond’s ghost-tax policies that harks back to just such a restriction when the R&D tax credit was first introduced. The PAYE limit was abandoned in 2012 but has risen once again from the graveyard to deter wrongdoers.
“This anti-avoidance rule will impact genuine claims made by technology start-ups where their payroll costs are low,” commented Mark Tighe, CEO of specialist advisors Catax.
“There is already a widespread lack of understanding about what constitutes R&D and who is eligible for this tax relief which was designed to boost innovation across all sectors. We were hoping to see R&D tax relief receive a further boost rather than increased restrictions. At the very least the government must address the confusion over exactly who can and cannot claim for R&D if it is to see the virtuous cycle in which R&D tax credits reinvested in further R&D spread across more sectors.”
Visit our at a glance guide for a summary of all the major measures from Budget 2018.
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