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R&D legislation change – PAYE cap for SME claims

HMRC have released draft legislation to implement a PAYE cap for SME cash back claims. The changes are complex, and you should consider them when budgeting for R&D claims after 1 April 2021. Here, our specialist R&D tax credits team have summarised what you need to know.
Background

Background

HMRC face an unprecedented level of fraud within the current R&D tax credits system. So these changes have been introduced to prevent the most common instances of fraud. 

HMRC has stated in the past: “HMRC has identified (and prevented) fraudulent attempts to claim the SME scheme payable tax credit totalling over £300 million”. This is a significant amount being lost to fraudsters, and the new legislation is a building-block in HMRC’s armoury to prevent further losses. 

Irrespective of the rights and wrongs of the proposal, it’s important you’re aware of these changes and factor them into future R&D claim budgeting.

About the author

Iain Butler

+44 (0)20 7556 1343
butleri@buzzacott.co.uk
LinkedIn

Background

HMRC face an unprecedented level of fraud within the current R&D tax credits system. So these changes have been introduced to prevent the most common instances of fraud. 

HMRC has stated in the past: “HMRC has identified (and prevented) fraudulent attempts to claim the SME scheme payable tax credit totalling over £300 million”. This is a significant amount being lost to fraudsters, and the new legislation is a building-block in HMRC’s armoury to prevent further losses. 

Irrespective of the rights and wrongs of the proposal, it’s important you’re aware of these changes and factor them into future R&D claim budgeting.

What do these changes mean for your business?

What do these changes mean for your business?

At a high level, the proposed changes mean the cash back available under the SME scheme will be capped at 300% of the PAYE and NIC paid by the claimant company. This cap will apply only to the cash back payment and doesn’t impact any reduction to corporation tax. 

Will this impact change your claim?

Will this change impact your claim?

  • If your business has a significant number of UK employees then this cap may not apply. But it’s worth reading on to see how this change may impact any of your future expansion plans. 
  • If your business’ staff costs element of your R&D claim is relatively small, this cap may limit your cash back benefit going forward. Therefore if your company is claiming R&D tax credits but has minimal PAYE and NIC payments, this draft legislation is important.

Because the way the cap works is specific to each company, it isn’t possible to provide thresholds, and this is why it’s important you discuss the cap with an advisor. 

The proposed cap comes with caveats to seek to reduce the impact on legitimate companies. 

HMRC’s proposed changes to the legislation includes the following provisions:

i. If the claimant company has subcontracted R&D, or is using staff from a connected company, then the relevant proportion of their PAYE and NIC may be included in the cap calculation. A ‘connected company’ is either another business within a group, or one with a substantially similar shareholding. The ‘relevant proportion’ will be the eligibility for the individual being claimed for. 

Our thoughts: We were hoping that for UK groups, HMRC may allow the total PAYE and NIC payments, but the current draft legislation is more restrictive. But it’s likely that hiring staff from UK connected party companies to undertake eligible R&D won’t cause this cap to be triggered. This isn’t the case for non-employee costs being claimed via a UK connected party, or work undertaken by an overseas connected party. In these cases the cap is likely to be triggered.

 ii. There is an exemption if the creation of the intellectual property (IP) related to the R&D project is managed by employees of the claimant company. Note this is the claimant company, not the group. The definition of IP is quite tightly defined and seems to be limited to either granted rights or live applications for patents, design rights or copyrights. Knowhow isn’t listed, so we don’t believe this would be sufficient unless the wording is changed from the current draft. 

Our thoughts: This part of the legislation is open to interpretation. But we suspect if you can show that the management team in the claimant company are closely involved in the day to day management of the R&D, and the IP created by the business flows through the claimant company, then your business may not have to worry about the new rules.

iii. But there’s one big caveat to applying this exclusion. If the R&D claim within the claimant company is made up of more than 15% of connected party qualifying expenditure (subcontracted R&D or externally provided workers), then this exemption around IP management doesn’t apply. This is a fairly low bar for many groups of companies, and could mean that many fall outside of the exclusion. We have a few clients where this cap is likely to impact claims going forward, so it’s critical you review this exclusion carefully. 

When will these changes be introduced?

When will these changes be introduced?

The last section of this draft legislation is somewhat contradictory. But we think the intent will be to start this restriction on 1 April 2021, and the legislation will force companies to split their accounting period into two if it straddles the implementation date. However the last section could be interpreted as applying to an accounting period starting on or after 1 April 2021. This will need to be clarified in the final legislation.

Conclusion

Conclusion

This may seem like a minor change to R&D tax credit legislation, but we’re finding that many businesses will be impacted. The rules are complex, and we’d recommend discussing the changes with an experienced advisor before dismissing them as irrelevant to you.

Speak to an expert

For more information on how to prepare a successful R&D tax credit claim and determine how this new legislation might affect you, please get in contact through the form below.

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R&D Tax Credits

R&D tax credits

We understand that R&D Tax credits are important to your business and you cannot afford to have delays in the repayment due to queries from HMRC. That is why we feel you need to engage an advisor you can trust. Our dedicated R&D team has the depth of experience to fully support your business with your claim preparation.

Find out more about R&D tax credit advice

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