Update: Research and Development Tax Credit Relief - 1 April 2021

 

A draft of new R&D rules were announced last week which could make a substantial difference to many R&D tax credit relief claims.  As these rules commence next April, company’s that have historically received a tax credit claim from HMRC could have an unexpected shock when they submit their future claims unless they have reviewed how these rules may affect them.

 

Qualifying expenditure on Research and Development (R&D) attracts four different forms of tax relief for Corporation Tax.

 

  • The Small or Medium-sized Enterprise (SME) R&D Credits Scheme.
  • The Large Company Scheme: R&D Expenditure Credit (RDEC).
  • The Patent Box.

 

Additionally, there are R&D capital allowances.

 

This note relates specifically to the SME scheme and in particular to those companies who reclaim a repayable tax credit based on their qualifying R&D expenditure.

 

Qualifying companies carrying out qualifying R&D whose qualifying R&D expense either increases or creates a tax loss in a year are able to surrender all or some of their enhanced R&D expenditure for a repayable tax credit.

 

So for a company with qualifying R&D expenditure of £100,000 the enhanced expenditure is £230,000 and if this can be fully surrendered it results in a repayable tax credit of £33,350.

 

Following two consultations, draft legislation has now been published which will introduce a cap on any claims for payable credits from 1 April 2021:

 

  • a company making a small claim for payable credit below £20,000 will not be affected by the cap
  • The cap will be the threshold amount of £20k plus three times the company’s total PAYE and National Insurance Contributions (NICs) liability for that year.
  • a company will 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’s claim will be uncapped, if it meets two tests. These tests require that a company’s employees are creating, preparing to create or actively managing intellectual property (IP) and that its expenditure on work subcontracted to, or EPWs provided by, a related party is less than 15% of its overall R&D expenditure
  • draft legislation, an explanatory note, and a tax information and impact note (TIIN) has also been published.

 

The changes to R&D SME tax relief will be legislated in Finance Bill 2021 and will have effect for accounting periods beginning on or after 1 April 2021.

For further information on any of the changes discussed above, or on R&D tax credits in general, please contact our Tax Director Mary Tierney on 01606 721300 or via email mary.tierney@bennettbrooks.co.uk