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The new cap on the SME R&D tax credit scheme

Further to our blog outlining the impacts of the Finance Bill 2021 we have received an update to the guidance on the new SME cap from HMRC.

What has changed in the guidance since the Finance Bill 2021 was first announced?

The original guidance stated that the measure will have effect for accounting periods beginning on or after 1 April 2021. The guidance has been updated and now also states that where a company has an accounting period beginning before and ending on or after that date, they will be treated as two separate periods and the cap will apply to the period from 1 April 2021.

This means that changes to SME R&D tax relief claims will happen earlier than was originally envisaged. For some clients, this change will impact the way we prepare a claim on their behalf, for any accounting period that straddles 1 April 2021.

Why introduce a cap on SME R&D tax credits at all?

The new rules have been designed to prevent fraudulent claims on the scheme that are ultimately preventing SMEs and start-ups from accessing funding designed to encourage them to innovate. The system has been increasingly abused by rogue companies that were accessing these incentives despite having no clear R&D activity whatsoever. By March 2020, fraudulent attempts to claim R&D tax credit had already exceeded £300 million for the year. In addition, HMRC identified specific companies that had been solely created to access tax credits, despite some having no prior legitimate activity within the UK.

These abuses not only reduce the available funds for genuine companies but also undermine trust in the thousands of genuine SMEs who are driving innovation and bolstering the UK’s economic prosperity. Preventative measures against this are welcome.

What are the details of the cap?

The cap will limit the payable R&D tax credit to £20,000 plus three times the total PAYE and NIC liability of the company for the year. Companies claiming below £20,000 will be unaffected in order to ensure small businesses that truly need funding are not restricted.

Similarly, companies are able to include “related party” PAYE and National Insurance contribution liabilities that are attributable to a R&D project when calculating the cap. However, we are still waiting on confirmation from HMRC as to whether this will include any compulsory contributions paid by a connected overseas related party in the relevant country. Plus, claims of any size – from genuine companies – will be permitted as long as they meet two tests.

The first measure will determine whether a company’s employees have been genuinely creating, managing, or preparing to create intellectual property.

The second is designed to ensure that the use of subcontractors is related to R&D. While these new, tighter rules will make it more difficult for rogue operators to claim cash for bogus operations, they will also enhance protection for genuine businesses.

To discuss the general implications of the new cap contact us.

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