R&D Tax Credits 2021: What’s new?
Did you know that your R&D tax credit claim could be capped?
The Budget 2021 released on 3 March 2021 brought good news for those working with data and cloud-based computing, as it now looks increasingly likely that this will be included in the new scope of tax reliefs. However, what may come as a disappointment for those qualified under the SME or R&D expenditure credit (RDEC) schemes is that there was no increase to the available R&D tax relief. Instead, what SMEs did receive was confirmation that the planned SME cap will come into effect. Businesses that particularly rely on subcontractors to assist with R&D will want to know what changes the new rules will make on their funding.
Who will this affect?
You should be aware of these changes if you are:
- An SME with no or low payroll expenses
- Planning to claim an R&D tax credit exceeding £20,000
- Subcontracting R&D work
- Managing international Intellectual Property (IP)
- Recharging personnel costs between group parties
Why are there changes?
The tax relief is a useful support for companies operating at a loss, with a tax credit worth up to 14.5% of the R&D element of surrendered losses available to claim. Unfortunately, increasing signs of the tax credit being used for fraud and abuse has prompted HMRC to put this measure in place. Perhaps a high-profile example of such fraud is the £29.5m R&D tax relief claim put forward by Convergica (Clinical Information Systems) Ltd, which subsequently prompted a HMRC investigation which jailed three men after 2 years of investigation. This is a sophisticated matter and sadly legitimate businesses can get caught in the anti-fraud net HMRC have cast, so it is important that as an SME, you understand the new rules put in place.
The new SME Cap
From 1 April 2021 the SME cap on available credit was set at £20,000 plus 300% of the total PAYE and NIC liability of the company in the interests of preventing abuse. HMRC have also introduced amendments to this legislation in order to ease its introduction:
“Where a company has an accounting period that straddles 1 April 2021, the measure does not apply to the part of the period from 1 April, but instead, only affects the next full period starting after that date.”
Therefore, a current accounting period is not subject to the new SME cap.
Exemptions for your claim do exist provided that your company meets both of the following criteria:
- Your employees are creating, preparing to create or managing Intellectual Property (IP). IP refers to intangible creations, such as copyrights, trademarks, trade secrets and patents.
- Your company does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPW) by, connected persons.
How will this affect my business?
As a business with an R&D venture you may want to receive tax credit funding in order to improve your cash flow, as you may receive trading profits and funding is typically reinvested for future projects that also meet the criteria for an R&D tax claim. The idea is that your one innovation paves the way for more future innovations, yet the cap instead risks disrupting cash flow by introducing uncertainty and obstacles for your business.
Fresh businesses looking to explore R&D further will need the tax credit as a way to secure essential cash injection to help them power through the use of external resources and tax losses when they start out. R&D is high cost and high risk, but the cap has the potential to delay this cash injection.
How does a subcontractor affect my claim?
As an SME involved in R&D activities, you can claim 65% of the costs paid to a subcontractor for qualifying activities. Similarly, companies under the RDEC scheme can claim the same amount provided that the subcontractor is an individual, a partnership of individuals or a qualifying body. The finer details on what qualifies as subcontracted work is quite broad, as your subcontractor does not need to be UK resident, nor does the work they carry out need to be done in the UK. Furthermore, there is no issue if the work your subcontractor carries it is not inherently R&D if viewed at in a vacuum so long as it contributes to your own R&D work.
But what if my subcontractor and I are connected parties?
If you are connected to the subcontractor, for example having a mutual shareholder, your claim for R&D tax credit is different. The amount you can claim can actually be more or less than the 65% available for non-connected parties, but the actual amount itself tends to be reliant on the actual costs involved with the claim and R&D project. The claim will also be for the lesser of the R&D payment and expenditure made to the subcontractor.
I think I am affected, what do I do now?
HMRC are strict and resolute in their application of rules and regulations, so if you are affected by the cap you need to take appropriate steps to make sure you aren’t unfairly caught out.
You should review any previous claims and see if the new cap would apply in those circumstances. If you have: subcontracted work domestically or internationally; have staff on low or no salaries; or if your business is new, you will likely qualify under the new cap. We’ve seen how strict HMRC can be and issued enquiries and penalties can be hard to recover from, so you need to have effective planning to mitigate the potential impact of the cap, which is what we can help you with.
HMRC are holding an open consultation which will run until 2 June 2021, with stakeholders being a primary target for thoughts.
WIM Accountants have a thorough understanding and great experience in dealing with R&D tax credit schemes. We offer top class advice and an R&D tax relief service, so you can relax knowing that we will make sure your claim is properly done and will get you the maximum claim you can get. If you have are still unsure about how this change affects you, or want to know more, get in touch at firstname.lastname@example.org.