Preventing abuse of R&D tax relief – new cap for SMEs from April 2021

To qualify for R&D tax relief, work carried out must be part of a specific project that seeks to make an advance in science or technology. Small and medium sized enterprises (SMEs) can claim an additional 130% of relief for eligible expenditure. The tax saving for profit making companies is 19% of this additional expenditure, while for loss making companies it may generate a repayable tax credit at 14.5% (subject to limits). 

The potential for a refund has provided much needed funds for cash-strapped businesses. We have seen the power of this during the coronavirus pandemic as increasing numbers of small companies have tapped into the tax value of their innovative work.

The relief is particularly valuable to start-up companies with limited resources. Often the director-shareholders cannot afford to pay themselves until they have concluded their development work and established a solid trade. 

As long ago as Budget 2018, the Government announced its intention to deter abuse by fraudulent businesses by introducing a cap on the repayable tax credit linked to the total PAYE (Pay As You Earn)and NIC (National Insurance Contributions) bill. The proposal met with considerable opposition that was followed by two separate periods of consultation. Some of the concerns raised have been addressed in the draft legislation published on 12th November.

The new measures limit the amount of the repayable tax credit to £20,000 plus 300% of the company’s total PAYE and NIC liability for the period. In other words, companies making claims for a repayable credit below £20,000 will not be affected. Where the cap applies, any losses will be carried forward to be relieved in future profit making periods.

A company will be exempt from the cap if:

• its employees are creating or managing intellectual property, and
• it does not spend more than 15% of its qualifying R&D expenditure on subcontracting to connected persons or in paying for externally provided workers from connected persons.

The new cap will apply for accounting periods beginning on or after 1st April 2021.

If you believe you may be eligible to make a claim for R&D tax relief we can help. It is easy to arrange a free initial consultation. We can talk to you either on video call, telephone or in person to better understand the work your company has carried out and the potential for a claim.

To book a consultation, call our friendly and experienced team today on 01243 929110 or make an online enquiry to get the ball rolling.

Date published 24 Nov 2020 | Last updated 20 Mar 2024