Changes to the Payable R&D Tax Credit for SMEs

The Government has announced changes to R&D Tax Credits, that are designed to deter fraudulent claims where no research and development has actually taken place within the UK. Although the changes were originally announced in 2018, the implementation has been delayed until now.

This change will restrict the amount of payable R&D tax credit an SME can claim to £20,000 + 300% of its total PAYE and National Insurance liability for the period.

There are some instances where an SME would not be subject to this cap:

  • If the company’s employees are creating, preparing to create, or managing, Intellectual Property.

and

  • It does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to externally provided workers.

This change will be implemented for any accounting periods beginning on or after 1st April 2021 onwards, meaning that for many companies, the first affected period will fall in this calendar year.

The companies that will be most affected by this change are:

  • Companies that outsource a large proportion of their R&D work, and therefore have low PAYE and NIC liabilities incurred by employing staff directly.
  • Companies that have software costs and other consumables making up a large proportion of their R&D expenditure.

If a company’s payable R&D tax credit falls below £20,000 per annum as standard, it will not be impacted by these changes.

Additionally, it is important to note that these changes only affect payable tax credits – a company can still continue to offset the value of their R&D expenditure against their Corporation Tax liability, or carry forward the resulting losses to offset against future years profits.

If you would like to find out more about how these changes to R&D could impact your company, please get in touch.