There have been some changes and delays since the first proposals but the legislation is now due to come into effect in April, with legislation in the Finance Bill 2021. Draft legislation was published in November 2020 but is seems that two areas are going to be further amended when the Finance Bill is published on 11 March.
Summary of proposed cap
The intention is to apply a cap on the amount of payable R&D credit that may be claimed by an SME. The pertinent original proposals are that the payable credit will be capped at three times the relevant PAYE/NIC liability of the company, plus £20,000.
There is also a possible exemption which would mean that the company is not subject to the cap at all. To qualify for this exemption, the company must meet two conditions:
Condition A requires the company to be creating or preparing to create intellectual property, or managing intellectual property which it holds. These activities must be undertaken mainly by the company’s own employees, and the company must have the right to exploit the intellectual property.
Condition B requires that the company’s qualifying expenditure with connected persons on EPWs and on subcontracting R&D activities does not exceed 15% of its qualifying expenditure.
‘Intellectual property’ for these purposes was defined in the draft legislation as any patent, trade mark, registered design, copyright, design right, performer’s right or plant breeder’s right (or corresponding rights in another country).
The definition of intellectual property, for the purposes of potential exemption from the cap, is to be widened to include both know-how and trade secrets. This is really important for those companies that don’t actively protect their IP, for example through patents.
The draft legislation currently states that the cap applies to accounting periods beginning on or after 1 April 2021. Importantly, however, it contains provisions that require a straddling period to be split between that part falling before 1 April and that part falling on or after 1 April. In other words an accounting period ended (say) 30 April 2021 would be split into two periods: 1 May 2020 to 31 March 2021 and 1 April to 30 April 2021.
Although the full period started before 1 April 2021, therefore, the cap would apply to that later period. This would have meant that periods already commenced could be impacted by this cap.
Changed commencement provisions
The intention is to remove the requirement to split the straddling period. The cap will only apply to full accounting periods beginning on or after 1 April 2021.
Both of these changes are very welcome and demonstrate the determination of HMRC and Treasury to introduce a cap in a manner that does not impact too much on genuine R&D activity. This is, after all, an anti-abuse measure.
I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on areas such as R&D tax relief, Patent Box and Creative Industry reliefs, as well as IP tax issues more generally.
Formerly a Tax Partner with KPMG LLP (UK), I left in 2011 to establish Aiglon Consulting.