BACKGROUND
The R&D Tax incentives scheme was introduced in the year 2000 for Small and Medium-sized entities (SMEs). The scheme provides an additional tax deduction of 130% on eligible costs, providing a benefit of 24.7% for tax-paying companies. For companies with no tax liabilities to pay, the R&D eligible expenditure and the additional deduction (130%) can be submitted to HMRC in return for cash at the rate of 14.5% (or 33.35% of eligible R&D expenditure).
The scheme has been very effective in encouraging companies to undertake R&D. However recently, HMRC has identified fraudulent attempts to claim over £300m in payable credits. In these cases, it was found that the companies had no R&D activity or had set up structures to claim the credits when they had little or no UK employment or activity. Consequently, as an anti-abuse measure, the government has introduced a cap on payable credits. The cap which is based on the claimant company’s PAYE/NI liabilities for the year is aimed at deterring abuse on the premise that fraudulent companies and those with little or no UK presence would typically employ few people.
SUMMARY OF CAP
- PAYE/NI BASED CAP
For the accounting periods beginning on or after 1 April 2021 there will be restrictions (referred to as the cap) to SME payable credits as follows:
- A company making a claim for payable credit below £20,000 will not be affected by the cap.
- To claim more than £20,000 of payable tax credit, a company’s maximum claim is calculated by multiplying its entire PAYE and NIC liability for that year by three and adding this to the £20,000 threshold (i.e £20,000+ 3*PAYE/NICs). Where a company has used workers from a connected party or group company for the R&D activities, the relevant portion of the PAYE and NICs relating to these workers can be included in the calculation of the cap. Further, where R&D has been subcontracted to related parties, the PAYE/NI staffing costs of that party incurred in performing those activities can be included.
- ACTIVE MANAGEMENT OF THE IP
The cap does not apply if the following two part test is met:
- (i) a claimant company (through its employees) actively manages IP arising from the R&D project; and,
- (ii) no more than 15% of its R&D expenditure is on related party subcontracting or related party Externally Provided Workers (EPWs).
The test on active management of the IP is focused on management activities (formulating plans and making decisions) around the exploitation and development of IP rather than IP ownership. This may include activities such as:
- planning/decision making associated with developing and exploiting the IP;
- deciding whether to grant licences, expanding research activities and development of their IP;
- deciding on maintaining and extending protection in other jurisdictions.
Evidence of active management of IP could include:
- descriptions of staff roles; board minutes,
- business plans;
- agreements for licencing or otherwise exploiting IP.
It therefore becomes even more important for a claimant company to maintain sufficient records in relation to its project activities.
To discuss how these changes impact your company’s R&D claims, please contact us at aarti@itaxadvisors.co.uk
This information is based on the Government’s second consultation document (March 2020) and subsequent draft legislation and explanatory note released.
Picture source: Canva.