Proposed Cap on R&D tax credit cash payments – HMRC consultation
The government announced in the Budget 2018 that the amount of an R&D tax credit cash payment that a loss-making business can receive per accounting period will be capped.
This applies to the SME scheme (companies with under 500 employees).
Currently if a company has a loss before looking at their R&D costs, or a loss is generated when the additional R&D deduction is made (the deduction is R&D costs x 130%) they can claim a cash payment worth 14.5% of the relevant loss provided they surrender their loss rather than carrying it forward.
The consultation is called “Preventing abuse of the R&D tax relief for SMEs” and as the name suggests the reason for the cap is to “help prevent abuse of the SME scheme” for Research & Development tax credit. The consultation ends at 11:59 on 24th May 2019.
“The government is consulting on how the cap will be applied, so as to minimise any impact on genuine businesses, before it is legislated in the Finance Bill 2019-20. The government welcomes responses and input from businesses and their representatives currently using or planning to use the payable tax credit.”
"The proposal is that the payable R&D tax credit i.e. a cash payment in exchange for surrendering a loss, will be capped at “three times the company’s total Pay As You Earn (PAYE) and National Insurance Contributions (NICs) liability in any one year” – in other words three times a company’s total payroll taxes for the relevant claim year.
“If a company’s payable tax credit is limited by the cap, it will still be able to claim a payable tax credit up to the level of the cap and carry forward any unused losses to use against future profits in the normal way.”
The companies that are going to be most impacted are those companies that have few or no salaried staff, or where R&D costs are large compared to payroll costs (so that’s likely to be loss making companies that are subcontracting a significant portion or all their R&D activities).
The consultation document states that:
“The whole of the PAYE and NICs liability which is payable during the accounting period to which the claim relates will count towards the cap, not just that part which relates to staff involved in the R&D activity.”
In my experience startup companies are one group that is likely to be hit, as it is quite common for startups to have no employees and use subcontractors, given they are often still seeking proof of concept and on a very limited budget. One suggestion that might minimise that impact is that:
"The government is considering applying the cap only to payable tax credit claims above a certain “threshold”, so that the smallest claims would be unaffected, keeping things as simple as possible" - They are seeking feedback on is what that level should be.
Read the full consultation document here: http://bit.ly/HMRC-consult-RD-May-2019
Are you ready to find out if you qualify or how much your R&D claims could be worth?