Capping down R&D tax credits
David O’Keeffe reviews plans to introduce a cap on the amount of payable tax credit which can be generated by an R&D tax relief claim. Is this rehash of the original PAYE and NIC cap?
Back to cap
When the R&D rules for small and medium-sized companies (SMEs) were introduced in FA 2000, they included a PAYE/NIC cap but this was removed in FA 2012 for accounting periods ended on or after 1 April 2012. In his 2018 Budget, the Chancellor announced an intention to reintroduce a PAYE/NIC cap for SME R&D claims to help combat fraudulent claims.
A consultation into the design of this new PAYE cap has been published. This consultation is not about whether a cap should be applied – it will be. It only addresses how the cap can minimise the impact on genuine claims by small companies.
The PAYE/NIC cap will encourage companies to use their own in-house employees to undertake the R&D. It is not a perfect tool, and one of its bigger flaws is that it penalises small companies (particularly start-ups) that use contractors rather than their own employees to undertake genuine R&D activity.
The cap is being introduced because the government is worried that the SME R&D credit is being abused by people making claims that are either fraudulent or where little or none of the actual R&D is done in the UK, particularly in situations where that non-UK R&D would have been done anyway.
How will it work?
The proposed cap will restrict the payable tax credit in any year to three times the level of the company’s total PAYE and NIC (primary and secondary) liability for that year. It will apply for accounting periods ending on or after 1 April 2020.
However, there is recognition that applying such a cap is likely to cause administrative burdens for some companies. The government is keen to explore possibilities for minimising this burden, whilst retaining the protection of a cap.
One proposal is that the cap will be subject to a threshold level of tax credit claim, such as £10,000. Respondents are asked what a sensible level might be in order to be effective in reducing the impact on genuine claims by smaller companies.
The condoc contains examples of how this might work, which can be better expressed as follows:
A Ltd spends £100,000 on R&D, which increases its loss by £130,000 (130% x 100,000) to a total of £230,000. It surrenders this loss for a payable tax credit of £33,350 (14.5% x 230,000).
A Ltd has a total PAYE and NIC liability of £40,000. It can receive a maximum payable tax credit of £120,000 (3 x 40,000). A Ltd is not be affected by the cap since it has enough PAYE and NIC liability to ‘frank’ its credit claim, so it receives its entire R&D payable tax credit claim.
B Ltd also spends £100,000 on R&D and has a total loss of £230,000 to surrender for payable tax credits of £33,350. However, B Ltd only has a PAYE and NIC liability of £3,000 for the year so doesn’t have enough PAYE and NICs liability to receive the full payable tax credit. Instead, B Ltd must make a claim at the threshold level of £10,000.
Whatever the threshold level that is finally agreed on, it won’t be as straightforward for claimants as the above examples suggest. HMRC is still concerned that there is scope for abuse and is intending to restrict the use of the threshold amount to one claim per year from any group under common control.
Use of group PAYE/NIC
It is proposed that companies will be able to take account of relevant PAYE/NIC from group or connected party companies. This would allow the claimant to take account of the PAYE/NIC of workers employed by another group company where they are subcontracted to the claimant or where they are working on R&D subcontracted to that group company by the claimant.
Being able to access the relevant PAYE/NIC of group companies would be very useful for some claimants but is unlikely to be of help to start-ups and other very small companies.
Carrying forward losses
The consultation also suggests that the cap will only limit the amount of the payable tax credit, it will not limit the amount of the additional R&D deduction. If the tax credit is capped the balance of the unused loss will be available to be carried forward, and then surrendered for payable tax credit when the company has sufficient PAYE/NIC liability. There would most likely be a time limit placed on this relief.
Whilst this PAYE/NIC cap is being reintroduced to help combat fraudulent claims, it clearly has the potential to impact on genuine claims from smaller companies.
The consultation is open until 24 May 2019, you can reply by email to [email protected] or post your comments below and AccountingWEB will make a response on behalf of all members.
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I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on R&D tax relief, Patent Box and Creative Industry reliefs.
I have been involved with the UK’s R&D tax relief regimes since the initial consultations on the introduction of the SME relief. In that time, I have developed an...