Introduced in Budget 2018, the government’s plans to cap R&D tax credits raised fears that legitimate claims by startups and small business would be denied. But the proposal’s recently concluded consultation period offers a ray of hope.
Back in the more innocent days of 2018, in what could be Philip Hammond’s last Budget, the government announced a PAYE restriction on those making R&D tax credit claims.
The tax credit has become increasingly popular. R&D tax credits provided almost £3.5bn of relief in 2016/17, according to government figures. That dwarves the £350m claimed in 2010, for example.
But with this popularity has come a concomitant abuse of the regime, the government argued. HMRC identified £300m in frauds claimed by “artificial corporate structures”. To deter abuse, the government proposed a cap.
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.
Critics very quickly poked a hole in the proposal’s logic, however: many startups are lossmaking. They have low or nil salary costs but rely on subcontractors. “So if you have nil PAYE or NICs liability, then obviously three times nil is nil,” Nigel Holmes, Catax’s head of RD technical operations told AccountingWEB.
Under the cap as proposed, these businesses will be cut off from any R&D relief. “It punishes the innocent claimants to tackle a minority of claimants who should be stopped using the anti-avoidance measures that already exist,” said Holmes.
RSM, in its response to the consultation on the cap, echoed Holmes’ warning. The accounting firm said it supports “efforts to clamp down on fraudulent claims” but argued that “the proposals could disproportionately impact startup companies”, particularly cases where directors take no remuneration in the early stages.
“These proposals need very careful consideration before the Finance Bill 2019-20 is enacted to ensure that the threat to genuine research businesses is minimised or preferably removed,” said James Tetley, RSM’s national head of R&D.
Tetley did remark, however, that RSM was “encouraged that the government has sought to consult widely and hope that the feedback provided by us and others is carefully considered”.
In the consultation document, the government acknowledged that some genuine companies may have “low PAYE and NICs liability relative to R&D spend” and therefore could be affected by this measure. “As genuine companies are not the intended target of the cap, the government is determined to keep any impact on them to a minimum and committed to consult on the cap before it is implemented.”
Catax’s Holmes is also hopeful that a compromise will be reached. “HMRC has already put forward some compromises into the consultation, including a threshold which they will pay out on, and if this gets enacted the proposed cap will have minimal effect,” he explained.
Basically, there'd be a de minimis level HMRC would pay up to before it applies the cap. What that cap is is still a matter of conjecture, with an array of figures bobbing around.
In Annex A of the consultation document, the government moots a threshold of £10,000 before the cap is applied. Catax's suggestion, Holmes said, is £75,000. In its consultation response, the CIOT called £10,000 “too low” and suggested a threshold of “at least £20,000”.
If the threshold is set high enough, Catax’s Holmes said, the cap's impact “will be minimal”. But no matter what the threshold, he said, there will still be some that are unfairly caught come April 2020. “They've gone about it the wrong way and it's affecting the wrong clients.”
