Budget 2020: Budget focuses on research & development but limited changes to the tax credit scheme.

The 2020 Budget included multiple announcements about research & development but it was surprisingly light on changes to R&D tax credits. The headline rate of benefit for large companies has increased, alongside the introduction of a new restriction and two consultations.

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Large company scheme rate increased to 13% 

The rate increase for the large company scheme will improve the benefit of the scheme for companies over 500 employees, along with smaller companies claiming under this scheme for grant funded work or client subcontracted research & development activities. Overall this change will increase the benefit of a claim by around 1p in the pound. There are no changes in the small company scheme rates.

Changes for SME and start-ups 

The SME cash back will be limited by the PAYE paid by the business from 1 April 2021. This is a major development that will disproportionately impact SMEs and start-ups. The change will be consulted on but we are expecting the cap to be around three times the total PAYE paid by the business. If start-up business owners do not take a salary this could exclude the business from obtaining cash backs so businesses will have to consider running a payroll much earlier in their development.

Data and hosting costs 

The second consultation is to expand the definition of research & development to include data and hosting costs which will be a major improvement for technology enabled businesses as it will allow them to claim for those activities. If this consultation is approved it will be highly beneficial for software enabled businesses or financial services businesses using large data sets for algorithmic development. This change will bring the R&D tax credit scheme into the 21st century and reflects the growing trend to move from physical hardware to hosted platforms.

What should you do?

Many small companies overlook claiming under the large company schemes. They need to ensure that they properly review all projects and do not exclude client paid or grant funded work. Making a claim for this type of activity will be even more beneficial going forward. 

Start-up or small businesses that rely on the R&D tax relief for cash flow purposes need to consider employing key personnel. If the company has insufficient PAYE payments the ‘cash back’ payment will be restricted. It may be possible to carry this ‘cash back’ forward but the details of the scheme are subject to consultation. This restriction will become law on 1 April 2021 so businesses need to be planning for this change over the coming year. This change will need careful modelling by each business but potentially the ability to claim an R&D ‘cash back’ will offset the downside of paying increased income tax and national insurance. 

Read more on the Budget here.

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