Preventing abuse of R&D Tax Relief for SMEs

What are the R&D Tax Credit measures due to come in for accounting periods starting from 1st April 2021?

The proposal in the Finance bill is:

A company claim for payable credit (R&D Tax Credits are only available under the SME scheme to claimants making a loss after the R&D deduction/relief is applied) below £20,000 will not be affected by the cap. The cap will be 300% of the company PAYE/NIC (excluding statutory deductions) and £20,000.

A company will include connected party R&D qualifying PAYE and NIC liabilities when calculating the cap, and the total will be increased by 300%. Connected parties are connected through shared control. These can be subcontractors or externally provided workers.

A company’s claim of any size will be uncapped if it meets two tests. These tests require that a company’s employees create or prepare to create or actively manage intellectual property (IP) and that its expenditure on work subcontracted to, or externally provided workers provided by, a connected party is less than 15% of its overall R&D expenditure.

My views on this change?

It is good that the cap has increased from the 2018 proposal. It is now £20,000 plus 3x NIC/PAYE. A company with no PAYE/NIC can still get a cash benefit for a claim up to £20,000. If the claim were more extensive than this, it would generate a £20,000 cash benefit and increase losses to carry forward. £20,000 is significant to a lot of small firms.

A company is exempt from the cap if:

it’s employees are creating, preparing to create or managing Intellectual Property (IP), and

it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D, or the provision of externally provided workers (EPWs) by, connected persons

How would I solve this problem?

Remove the test on IP and on connected party expenditure.

In the case of preventing the abuse, the simple question arises “what would have stopped them faking the IP consideration or even applying for it outside the UK where the fake subcontract work was supposed to be done?” The IP test does not deal with the problem the legislation attempts to solve.

What did defeat an attempted abuse is security/money laundering checks by HMRC. It seems this would defeat fraud, not subjective judgments about applying for IP. HMRC have a lot of information to make those judgments on. Why not make that process better and focused on claims that are impacted by the cap?

No measure will be perfect, but it seems odd to bring back IP considerations into R&D claims which were removed from the SME scheme in 2012 because of the highly subjective nature of such judgments. IP is a relatively complicated legal area.

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