Updated R&D Tax Credit legislation is coming - Are you ready?

New restrictions will apply to the payable R&D tax credit available to loss making SMEs from 1 April 2021. Are you ready?

Changes to R&D tax legislation are uncommon but they do happen, and the new restrictions coming into play on April Fool's Day are no joke. They are certainly worth paying attention to.

In times like this, trustworthy R&D tax legislation specialists like us make for a good ally. It's very much a part of our mission here at Momentum to share our knowledge and keep our clients fully compliant.

Welcome to our quick no-nonsense guide on what these new restrictions are and how they might impact your future claims.

Q. What's changing?

A. In short, HMRC has announced a new restriction on the level of tax relief available to certain loss-making SMEs.

Currently R&D tax relief can reduce the cost of R&D by up to 24.7% for a profit-making SME and 33% for loss-making firms, the government is introducing a restriction on the amount of payable R&D tax credit a company can receive in any one year.

HMRC has announced that they will now be capping the limit at £20,000 plus three times (300%) the company's relevant PAYE expenditure on workers for the period, although this this may include PAYE/NIC related to connected third party expenditure.

Q. Why are HMRC introducing this change now?

A. Quite simply, the update comes as an attempt to clamp down on the abuse of the R&D Tax Credit initiative by loss-making firms. Some good news, though, is that there will be certain exemptions available to minimise the impact on companies with a genuine claim. We'll get to those later.

Q. My business is a loss-making SME. What does this mean for my future claims?

A. First off, if your company has substantial UK payroll costs there should be very little impact on your claim. Only those SMEs with limited UK staff presence or those with high levels of R&D sub-contracted to or connected to 3rd party organisations will feel the hit.

Q. You mentioned exemptions?

A. Yes. So, following an extended consultation that began in 2018, HMRC confirmed they'd put in place two major exemptions which help minimise the impact of this anti-abuse measure on genuine businesses:

• Your company is exempt if it's making a small claim for payable credit below £20,000.
• Your company will be able to include related 3rd party PAYE and NIC liabilities attributable to the R&D project when calculating the cap, and these will be subject to the 300 percent multiplier.
• A claim, of any size, will be uncapped if it meets the following two tests:
  1. a company’s employees are creating, preparing to create or actively managing intellectual property (IP).
  2. that its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15 percent of its overall R&D expenditure.

You can read and review the draft legislation and HMRC’s explanatory note which have now been published. The changes will be legislated in the Finance Bill 2021.

Q. I think this might impact my business. How can I prepare?

A. If you're part of a loss-making SME that has low UK PAYE/NIC liabilities you should investigate if, and how severely, these new rules restrict the amount of R&D tax credits available. If you do find that you may be impacted, the next move is finding out whether you can qualify for the above-mentioned exemptions.

Here at Momentum R&D Tax Credit services, our own clients will be guided fully through the impact of these changes and helped in making the necessary preparations. Our team are always happy to help so if you too would like our assistance please do not hesitate to contact a member of our team.