New cap for SME payable R&D tax credit claims – All your questions answered
Will your SME be affected and, if so, how can you prepare for the new cap?
For companies relying on R&D tax credits it was a mixed 2018 Budget day. Chancellor Phillip Hammond announced the government’s pledge to raise the total R&D investment to 2.4% of GDP by 2027. The Budget report also shouted about an extra £1.6bn for its modern industrial strategy, ensuring that British companies stay at the forefront of world-leading industry.
However, with the good news came the sting of a new cap for payable R&D tax credits. This came in the form of a PAYE and NIC restriction surrounding the amount that can be claimed. Below, we guide you through all of the potential questions UK SMEs may have in relation to what the cap means for them.
What is the new cap to payable R&D Tax Credits?
A change in legislation was announced which will see the Government reintroduce a cap on the SME payable R&D tax credits. The cap relates to the PAYE and NIC paid by SMEs within a claimable period.
The proposal states it will introduce a cap of 300% (or three times) the company’s total PAYE/NIC payment for the period.
Before 2012, however, the Government were not so lenient and you could not claim R&D tax credits if you had paid no PAYE or NIC. This was abolished after 2012, with the government now reintroducing the policy with the added three times PAYE/NIC leniency.
Why has the new cap to R&D Tax Credits been introduced?
The PAYE/NIC cap has been introduced to ensure businesses are acting legitimately and to guarantee the tax relief is fulfilling its intended purpose.
It has been positioned by the government as an anti-fraud measure. HMRC uncovered a total of £300m in fraudulent claims by “artificial corporate structures”. This was occurring where structures had been set up to claim the payable tax credit despite having little or no employment or activity in the UK.
Who will be affected by the cap on R&D Tax Credits?
The most likely to be affected by this cap are SMEs who are in the early stages of their life. Generally speaking, start-ups do not employ many employees and often use contract workforces for projects.
Those who do not have permanent employees will not be paying as much as PAYE/NIC as those who do. Companies that are flexible in relation to employment, who use different skill sets for different projects, and are heavily weighted towards third-party costs rather than salaried staff, are the most likely to be hit by the cap.
The Treasury has stated that close to 95% of companies currently claiming the payable credit will be unaffected. However, consultations are to be carried to both confirm that is true and to ensure the impacts are minimised.
How will the new cap to R&D Tax Credits affect SMEs?
Essentially, after the change, an SME’s salary bill will affect the value of its R&D Tax Credit claim. SMEs will have to think about how they resource their business, as it could have an impact on the value of the payable credit.
SMEs will need to reassess their ratio of costs to ensure they are paying enough PAYE/NIC to claim payable credit. They will need to weigh up the pros and cons of the personal tax efficiencies versus the benefits of the business paying salaries and then receiving cash credit.
It is also worth bearing in mind that the cap will only apply to claims for payable tax credit, and will not affect the calculation of the enhanced R&D expenditure.
What are payable tax credits?
Understandably, not everyone understands the ins and outs of payable and non-payable tax credits, so we have a simple explanation below:
Payable tax credits
These are also known as non-wastable, or refundable tax credits. They are not limited and can exceed the value of any tax liability, including a liability of zero. This means they can exceed any tax debt, and can also be paid directly to an individual or company in cash. This type of credit is solely what the new cap relates to.
Non-payable tax credits
These are also known as wastable, or non-refundable tax credits. They are limited in value to the value of your tax liability. Therefore, these tax credits can only ever be granted to individuals or companies with tax liability (a tax debt).
A tax liability is the total amount of tax debt owed by an individual, corporation or other entity to a taxing authority, like HRMC.
When will the new cap on payable R&D Tax Credits come into place?
With this being a relatively big change in how R&D Tax Credits are claimed, the government has factored in time for consultation.
The initial proposal sees the cap starting on or after 1stApril 2020, which should give HMRC enough time to minimise disruption.
This also gives SMEs enough time to prepare and act now in anticipation of the coming changes.
How can RDTaxCredit.org.uk help?
The proposed changes are significant and will fundamentally change how SMEs apply for R&D Tax Credits. By discussing these issues now, SMEs can be better prepared to reduce any potential changes to cash flow.
RDTaxCredit.org.uk can add real value here. We can advise on how to take action now in order to protect your SME payable R&D tax credit. Now, more than ever, it is vitally important SMEs understand what they can claim for, the process of the R&D tax credit claim, and all of the pitfalls many SMEs encounter while applying.
Our expert team of accountants are committed to working with you and your company to provide strategic R&D tax credit advice in the wake of these changes. We can review how it may affect your claim and propose new techniques to ensure you claim the maximum amount you are entitled to.
At RDTaxCredit.org.uk, we understand that beginning to think about claiming R&D Tax Credits may be a little daunting. We want to help you through the process, to ensure you receive the financial reward that the government wants to give you.
We offer a friendly and professional approach to R&D Tax Credits which includes:
- A free no obligation initial review.
- 100% success rate
- 30 day quick turnaround
Contact one of our expert advisers today for a free initial review, and see if you can claim back some much needed tax relief.