Research and Development tax credit regime tightened to avoid abuse

The Government has announced changes to the R&D tax credit regime in order to counteract fraud and tax abuse.

Research and Development expenditure enhancement for small and medium-sized limited companies allows for an uplift in the tax deduction of 130% of qualifying expenditure (see for more detail). This reduces a company’s taxable profits and/or increases the tax losses.

So long as the company is a going concern the same scheme provides support to tax loss-making companies by allowing them to sell the R&D element of their tax loss to HMRC and receive a tax credit worth up to 14.5% of the surrendered losses and receive a cashflow benefit.

Unfortunately, the tax credit has become a target for fraud and consequently changes will be included in the Finance Bill 2021 which are expected to apply to accounting periods beginning on or after 1 April 2021.

The new rules will restrict the amount of payable R&D tax credit which a SME can claim to £20,000 plus three times its total PAYE and National Insurance contributions (NICs) liability for the accounting period. The rules will also prevent double counting where the PAYE and NIC liabilities count towards more than one company’s cap.

However there are some exemptions for companies with low levels of PAYE and NIC whose employees are engaged in creating, preparing to create or managing intellectual property (IP) and if it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D or using externally provided workers or connected persons for the R&D.

These companies will have to provide documentary evidence of their R&D activity (which may include management time spent on ‘formulating plans and making decisions in relation to the development or exploitation of the IP’). This requirement to document the activities means that companies with low levels of PAYE and NIC undertaking genuine R&D will experience increased compliance requirements.

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