R & D Tax Credit changes – what you need to know

1st March 2021

By Joanne Colwell, Partner

Recently, the Government announced a change to a part of the Research & Development (R&D) Scheme. The update will affect small and medium-sized enterprises (SMEs) that conduct R&D and claim the payable R&D tax credit. It comes into effect from April 2021, so it’s worth noting now. 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.

What is R&D tax credit?

R&D Tax Credits are paid to eligible companies that claim for costs in developing new products, processes, software or services. They receive a cash payment or corporation tax deduction from HMRC. 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, which is designed to encourage genuine innovation. 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 legislated in the Finance Bill 2021 and 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.

What can my business claim?

Profit-making SMEs can claim back 24.7% of eligible development expenditure, and loss-making SMEs up to 33%, in the form of payable tax credit (cash). Large companies can recoup 9.7% through the Research and Development Expenditure Scheme (RDEC).

Next steps for checking eligibility for R&D Tax Credits and claiming

To ensure you get your full entitlement to R&D Tax Credits, it’s worth checking with an expert. They will be able to confirm whether or not your business qualifies, estimate how much you might receive and help you to claim. Contact us for more information.

About the author

Joanne is a tax partner.  She joined Wise & Co in 2002 and qualified as a chartered tax adviser in 2005.  Her role has developed over the years and she combines a highly technical knowledge of taxation legislation with a practical and commercial approach to problem solving.  She regularly advises on the tax aspects of business restructures, mergers and demergers, research and development claims, and the implementation of share option schemes.

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