Payable R&D tax credits for SMEs

15 May 2019

As part of the 2018 Budget, the government announced a consultation on “Preventing abuse of the R&D tax relief for SMEs”. The consultation cites examples of abuse of the rules including structures set up in the UK to claim a repayable credit even though no R&D work was actually carried out in the UK and the UK entity had few employees.

To prevent such abuses, in the recently published consultation document, the government proposes to re-introduce a cap on the amount of payable SME tax credit a qualifying loss-making company can receive through the relief in any one year. The cap proposed is three times the company’s total PAYE and NIC’s liability for the period and is to be introduced from April 2020. 

SMEs that may be affected

Although this is an anti-avoidance proposal, many genuine SME claims will be affected. The proposals are likely to affect loss making SMEs that either:

  • Outsource the majority of SME activity offshore and have limited UK staff, 
  • Companies where a major proportion of R&D costs claimed arises from subcontracted out R&D work, or
  • Companies where a major proportion of R&D costs arises from consumables (eg expensive raw materials) or software costs.

Repayable tax pool

The consultation document acknowledges that applying a cap to the amount of payable tax credit a company can claim will add some administrative burden for businesses. The government is considering whether to apply the cap above a certain “threshold” so that companies with small claims would be unaffected. However, no details have been provided on the level of the “threshold” being considered – the document seeks suggestions. Interestingly, based on HMRC’s own statistics published in September 2018, setting a thresholds of around £50,000 of qualifying expenditure would exempt the vast majority of small R&D claims.

Where the company is part of a group (but still meets the SME definition), the government is considering whether to include some of the PAYE and NIC liabilities of other companies in the same group as the claimant company to calculate the cap. This is likely to apply to the PAYE and NIC liabilities of the group companies and connected party company’s staff, either provided to the claimant company as connected party EPWs, or those employed in the connected party’s subcontracted R&D activities provided to the claimant company.

Carry forward

Where a company’s payable tax credit is limited by the cap, the government is also considering proposals to allow such companies to carry forward the loss as a “carried forward (potentially surrenderable) loss”. These losses can be used as normal in a later accounting period, or there would be an option to surrender them in exchange for a payable tax credit for a limited period of time (2 years has been proposed) if there is sufficient PAYE and NIC liabilities in a future period. However, this carry-forward proposal is far from certain: the government is concerned that it may encourage unscrupulous companies to take on further employees in later periods simply so that they can claim the credit. 

Next steps

The government’s own R&D statistics for claims up to September 2018 document sets out that there has been a substantial increase in R&D claims since the rules for SMEs were change in April 2012 (to remove of the requirement for a minimum R&D expenditure of £10,000). However, it is far from clear how much of this activity is ‘abusive’. As with all successful tax incentives, there is always a risk that it becomes a victim of its own success and starts to be regarded as too expensive in the eyes of the government. 

The proposals are still under consultation (which closes on 24 May 2019), legislation is expected to be announced in Finance Bill 2019/20 and to be effective from April 2020. BDO will be taking part in the consultation exercise and urging the government to ensure that any changes do not damage the UK’s strong support for R&D activity carried out by start-up companies and SMEs’.

Read the consultation document.

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