From April 2021, the amount of R&D tax credit payable which an SME can claim has been limited to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.
The R&D tax credits incentive is to encourage businesses in the UK to innovate and increase their spending on R&D activities. Eligible expenditure includes software licenses, staff costs, agency workers, sub-contractors and consumable items.
The SME scheme is particularly helpful for enterprises that are making a loss in this area, as it provides either a discount in Corporation Tax or a tax credit (payable lump sum), worth up to 14.5% of the R&D element of their surrendered losses.
What has changed?
The purpose of the change is to target and prevent abuse of the scheme. The amount of R&D tax credit payable which an SME can claim has been limited to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.
In addition, a company may be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap and these will be subject to the 300% multiplier.
A company making a small claim for payable credit below £20,000 will not be affected by this cap.
When do the changes happen?
The changes to the R&D SME tax relief will be implemented from 1 April 2021. For companies with accounting periods that straddle this date, there will effectively be two tax periods – one up to 31 March 2021 with no R& D cap and then from 1 April 2021 to the period end.
Are there any exemptions?
A business is exempt from the cap if:
- Its employees are preparing to create, creating, or managing Intellectual Property (IP); AND
- It doesn’t spend more than 15% of its qualifying R&D expenditure on:
- Subcontracting R&D to connected persons; or
- Provision of externally provided workers (EPWs) by connected persons.
Change is ongoing – how to keep abreast
The level of scrutiny and resulting change in the R&D Tax Credit scheme has been steadily increasing over the past three years, particularly as regards to software.
This has in part been driven by the need to reflect how the world of software development has changed over the years, and in part by the recognition that the scheme is open to abuse and is being abused.
Therefore, getting the balance right between optimising future claims, whilst ensuring compliance, will require constantly up to date knowledge of the scheme, as well as deep technical competency.
That is what will separate the men from the boys, when it comes to selecting your R&D Tax Credit advisor in future.
How can MSC R&D help?
- We specialise in software claims – the bigger the better
- We employ teams of highly experience technical and financial analysts
- We employ the guy who wrote the rule book
- Our quality systems are second to none
- Our fast-track process minimises the impact on your time.
Interested? – call us on 0114 230 8401
