R&D Tax Credit Cashback Capped but the Annual Investment Allowance Soars Momentarily
The UK autumn budget 2018 slipped in a change that will cap payable research and development (R&D) tax credit from 2020, while increasing the annual investment allowance (AIA) for two years.
The cap on R&D tax credit will adversely impact some companies while the increase in the annual investment allowance will be welcomed as it's something the British Chamber of Commerce has wanted to see for some time. This article looks at what these changes mean for UK Small and Medium Enterprises (SMEs).
Cap on R&D tax credit payments
The cap announced is a restriction to the amount of payable R&D tax credit that a loss making company can claim. It will apply from 1st April 2020. It will impact on SMEs R&D claims where the claimant company has few salaried staff but significant R&D costs from using external contractors.
The cap limits the amount of cash a company can claim to three times the company’s total PAYE and National Insurance tax liability (i.e. total payroll taxes) for the relevant R&D claim year. There was a similar cap in the past that was abolished for accounting periods starting on or after 1st April 2012. That cap was more restrictive as it limited the payable tax credit to total payroll taxes paid in the year, while this time it’s much higher at three times payroll taxes.
It will be introduced in 2020. The Chancellor presented the change as a way of eradicating fraud whereby companies set up structures abroad to purportedly carry out R&D, with few or no costs in the UK claimant company. Undoubtedly some legitimate claimants will be caught out by the change. There is a consultation period so some adjustments may be made before implementation in 2020.
Increase in Annual Investment Allowance (AIA)
The annual investment allowance will increase from £200,000 to £1 million for the two years starting 1st January 2019. This was announced as a response to the ‘longstanding ask by the British Chamber of Commerce’. AIA is a capital allowance that enables businesses to manage their cash flow when buying assets such as equipment, fixtures, plant and machinery, as it reduces taxation in the year of the purchase but unlike R&D tax relief and tax credit, it’s not an outright tax saving.
Where a company’s accounting year spans the year-end, with only part of the year falling into the higher AIA allowance period (1st January 2019 to 31st December 2020) the AIA allowance will need to be pro-rated to work out the cap that applies.
There was also good news for entrepreneurs starting up new companies as the Star-Up Loans funding was extended to 2021. A Start-Up Loan is a government-backed personal loan available to individuals looking to start or grow a business in the UK.
Are you ready to find out if you qualify or how much your R&D claims could be worth?