Preventing abuse of R&D tax relief for SMEs: consultation

The Government is consulting on the introduction of a cap on the payable tax credit element of R&D tax relief for SMEs.

The Government is consulting on measures to introduce a cap on R&D tax relief for small and medium companies which were announced in the October 2018 Budget. The consultation, entitled “Preventing abuse of the R&D tax relief for SMEs”, seeks feedback on the Government’s proposals to limit R&D tax relief by introducing a new anti-abuse “cap” to the SME R&D scheme payable tax credit by reference to a multiple of three times the entity’s PAYE and NICs liabilities. The consultation, which runs to 24 May 2019, seeks responses on how the cap can be targeted at abusive situations without adversely affecting genuine businesses.

Background

The consultation recognises that R&D tax reliefs, including the small or medium sized enterprise (SME) scheme, support business investment and are a core part of the government’s support for innovation. The SME scheme is particularly generous in providing either a corporation tax deduction or a payable tax credit for loss making entities. The payable tax credit in the SME scheme provides valuable support to loss-making companies as it allows those companies to claim a payment worth up to 14.5% of the R&D element of their losses. The additional rate of tax relief under the SME scheme has also been increased to 130%, meaning that, taking into account the normal corporation tax deduction, R&D tax relief effectively reduces the cost of R&D by up to 44% for a profit-making SME and 33% for loss-making SMEs.

However, because the tax credit effectively generates a cash payment to the company from HMRC, the government is concerned that the tax credit has become a target for abuse. Given increasing cases of abuse, the government announced at Budget 2018 the introduction of a new anti-abuse “cap” to the SME scheme payable tax credit. The proposed cap is based on a company’s total Pay As You Earn (PAYE) and National Insurance Contributions (NICs) liability in any one year. This will deter abuse because fraudulent companies and those where the UK activities amount to little more than claiming the payable credit typically do not employ many people or pay PAYE and NICs. The change will come into effect for accounting periods which commence on or after 01 April 2020.

However, it is the government’s intention that genuine companies undertaking R&D should not be adversely impacted by the cap. Therefore, the government committed to consult on how the cap will be applied, to minimise any impact on genuine businesses.

Consultation

The government acknowledges that applying a cap on the amount of payable tax credit will add some administrative burden for businesses. The government is therefore considering applying the cap only to payable tax credit claims above a certain “threshold”, so that the smallest claims would be unaffected, and so reducing the administrative burden. However, the whether the “threshold” has been met would be measures on a group basis, rather than an individual entity basis.

To allow companies to maximise the amount of payable tax credit that can be claimed, the government is considering including in the calculation of the cap some of the PAYE and NICs liabilities of other companies that are part of the same group or connected with the company. The group or connected party PAYE and NICs that the government is considering including would be an element of the PAYE and NICs contributions of workers engaged in an R&D project subcontracted by the company to its group or connected party.

The government is also considering allowing carry forward of payable credits. If a company’s payable tax credit is limited by the cap, it will still be able to claim a payable tax credit up to the level of the cap and carry forward any unused losses against future profits in the normal way. However, the government is also considering allowing the companies affected by the cap to access the rest of their payable tax credit when they’ve built up enough PAYE and NICs liabilities in a future year. Where potentially surrenderable losses cannot be surrendered for a payable tax credit because of the cap, those losses, to the extent that they are carried forward, would still be potentially surrenderable. These “carried forward (potentially surrenderable) losses” can be used as normal in later accounting periods, but companies would also have the option to surrender them in exchange for payable tax credit for a limited period of time if there is sufficient PAYE and NICs liability after any claim which relates to the current year. The government suggests a period of two years may be appropriate.

Finally, while the cap is intended to target abuse, the government is aware that some genuine companies could still be affected. These could be genuine companies paying low amounts of PAYE/ NIC relative to their R&D spend; either because of the stage they are at in their lifecycle, or because of their particular business model. As these genuine companies are not the intended targets of the cap the government says it will work with stakeholders to refine its application so that legitimate companies and business models will be protected as far as possible - whilst preventing the abuse that has been identified. The government is particularly open to receiving representations for other proposals on how to limit the cap to preventing abuse of the payable tax credit more generally.

Comments

The consultation on the introduction of the cap runs until 24 May 2019 and responses should be sent to: consultation2019.rdtaxrelief@hmrc.gov.uk

It is intended that the cap will apply with effect for accounting periods which commence on or after 01 April 2020 and will be legislated for in the Finance Bill 2019.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.