If your company claims R&D tax credits for SMEs, you may remember the government proposed changes to the system in the 2018 Budget. At the time it announced that the amount of Research & Development tax credits a business could receive in one financial year would be capped.
The government wanted to introduce the change to help prevent abuse of the R&D tax credits system. HMRC had identified fraudulent claims totalling hundreds of millions of pounds. Some companies were set up to claim R&D tax credits, even though they didn’t actually undertake any research. Other firms claimed for the tax credits through a UK entity, even though its R&D expenditure wasn’t made in the country.
These changes have now come into effect.
So, what are the changes?
Changes to R&D tax credits for SMEs
These are the main changes you need to be aware of:
- SMEs can normally only claim up to £20,000, plus 300% of its total PAYE and NI contributions for the period.
- Companies that sub-contract some of the R&D work to a connected company can potentially claim 300% of the relevant PAYE and NI associated to that work (BUT see below for conditions of sub-contracting work)
The cap doesn’t affect SMEs making small claims under £20,000. However, for many businesses, these conditions could severely limit the amount of R&D tax credits they can claim.
Exemptions to the R&D tax credit cap
Thanks to the consultation carried out in 2020, the legislation also contains caveats. These are designed to ensure genuinely innovative businesses don’t lose out. If an SME meets both of these conditions, then it should be exempt from the R&D tax credit cap:
- The company’s employees are creating, preparing to create or managing Intellectual Property (IP). These activities must largely be undertaken by the company’s own employees. The firm must also have the right (alone or with others) to exploit the IP.
- The company must not spend more than 15% of qualifying R&D expenditure on subcontracting the research and development, or on externally provided workers (EPWs)
When did the changes come into force?
The changes came into force for accounting periods beginning on or after April 2021.
Overall, the new legislation strikes a good balance between preventing abuse of R&D tax credits for SMEs and supporting genuinely innovative businesses. However, if you currently claim R&D tax credits or plan to do so in the near future, we strongly recommend talking to your accountant for advice. If you are THP client, please give us a call.
About Andy Green
As Client Director Andy Green works primarily in delivering audit and assurance services, particularly in the Retail and Technology Sectors, as well as being the firm’s Compliance Director. These roles both bring great responsibility in ensuring that the outstanding quality and reputation of the firm is maintained.
After training and qualifying with a mid-tier firm of Chartered Accountants in the City, Andy spent some time in investment banking before joining THP in 2008, a move driven by his desire to get back into the profession. “The beauty of working for an accountancy practice is that every day is different – and you’re constantly achieving successes for your clients.” With Andy’s natural ability in interaction, THP is the ideal place.
With his positive drive and sense of humour Andy works with an array of clients, giving each the ultimate attention no matter what the size of their company.