The New Cap on R&D Tax Credits: The Exemption, Pitfalls and Potential Remedies
Background to the Cap
For accounting periods beginning on or after 1 April 2021, HMRC have introduced a PAYE/NICs cap on payable SME R&D tax credits in order to counter perceived avoidance. The legislation is in Finance Act 2021.
The payable tax credit in the SME scheme provides valuable support to loss making companies and is a core part of the government’s support for innovation.
However, because it generates a cash payment to the company from HMRC, it has become a target for abuse. Since the previous PAYE cap was removed in 2012, HMRC have noticed an escalation of fraudulent claims. They have identified a number of structures where expenditure outside the UK has been re-routed through a UK entity which has little or no employment or activity and is set up wholly or mainly for the purpose of accessing the payable tax credit.
Whilst HMRC recognizes that there will be circumstances in which a UK company would benefit from carrying out R&D outside the UK, their concern is that companies are manipulating the scheme to gain a benefit for activity which would have taken place anyway and would not otherwise have anything to do with a UK business.
They also understand that some genuine companies may have low PAYE and NIC liabilities relative to R&D spend, particularly those in Life Sciences that follow an outsourcing model, and therefore could be affected by this measure. As genuine companies were not the intended target of the cap, HMRC requested to hear industry responses via consultation before the legislation was finalized. FTI Consulting actively participated in this consultation in conjunction with the BIA, and this has resulted in an exemption that should minimise the impact on genuine companies.
The Cap
Following several consultations, the legislation has now been finalised and applies to accounting periods beginning on or after 1 April 2021. The rules are:
- The cap on the repayable credit for a claim by a loss-making company under the SME scheme will be £20,000 plus three times the claimant’s total PAYE/NICs.
- PAYE/NICs of employees of connected parties providing services to the claimant may also be included in the above calculation if attributable to eligible projects.
- Claims below £20,000 will not be impacted by the cap.
The cap will only be applicable to accounting periods that begin on or after 1 April 2021.
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