Research and Development (R&D) Tax Relief helps innovative small or medium sized enterprises (SMEs) undertaking R&D related activity claim a generous corporation tax deduction or a cash refund from HMRC.
Profit-making SMEs can claim relief of up to 24.7p for every £1 spent on R&D by reducing their corporation tax bill, or receiving a corporation tax repayment on any corporation tax already paid. SMEs that are loss-making can claim relief of up to 33.35p for every £1 spent on R&D by receiving a tax credit or cash refund at 14.5%.
In a bid to deter abuse of the generous scheme, HMRC have introduced a restriction for the amount of R&D tax relief received by SMEs in a year. Effective from 1 April 2021, the cap is set at £20,000 plus three times the company’s total PAYE and NIC liability for SMEs claiming R&D tax credits. It is important for all SMEs planning a tax credit claim to be aware of the new rules.
A Ltd is a loss-making business which carries out qualifying R&D activity. It has £200,000 of qualifying expenditure, and a PAYE/NIC liability of £10,000.
Under current rules:
A Ltd should be able to claim up to 33.35% of its expenditure as a payable tax credit worth up to £66,700.
Under new rules:
As a result of the PAYE/NIC cap, A Ltd will only be able to claim 300% of its PAYE/NIC liability, plus the £20,000 ‘grace amount’. This means that A Ltd’s payable tax credit will be capped at £50,000 – reducing funding by £16,700.
The cap will mainly impact SMEs that:
Where a company has an accounting period that straddles 1 April 2021, the measure does not apply to the part of the period from 1 April, but instead, only affects the next full period starting after that date. For example, if the company has a February year-end, its 2021 and 2022 claim will remain unaffected by the new rules. However, the PAYE/NIC cap will affect its claim for the year ended 28 February 2023.
To minimise the impact of the cap on genuine businesses, the following exemptions apply:
The new rules apply to all R&D expenditure incurred on or after 1 April 2021.
Partner - Corporate and R&D Tax
FOR GENERAL INFORMATION ONLY. The information provided in this article is for general information only and does not constitute any specific advice or guidance. Whilst every care has been taken in the preparation of this article, it may contain errors and/or omissions. Always seek professional advice before taking any action. Last updated July 2021.