The rules regarding R&D tax credit claims for the SME scheme are changing from April 2021 and it could affect the ability of many small tech businesses to obtain this important tax relief.
The Government is looking to introduce a new PAYE cap on qualifying expenditure next year, which will attempt to prevent abuse of the R&D tax credit system.
The new measures will limit the amount of payable R&D tax credit that an SME can claim to just £20,000, plus 300 per cent of its PAYE & NIC liabilities for the period.
A company making a small claim for payable credit below £20,000 will not be affected by the cap. However, a company’s claim will be exempt from the new measures if it meets two tests:
- a business’s employees are creating, preparing to create or actively managing intellectual property (IP); and
- its expenditure on work subcontracted to, or externally provided workers (EPWs) provided by, a related party is less than 15 per cent of its overall R&D expenditure.
While many businesses may be unaffected by these changes, any companies that are heavily reliant on subcontracted work for their R&D projects may find that they are limited to how much tax relief they are eligible for.
This will be a worrying sign for many small tech companies, who early in their life often rely on the work of subcontractors and outside experts when conducting R&D work.
The decision to apply this test is likely to mean that many start-ups and newly formed businesses, who have been trading for three years or less, will only be able to claim the capped amount.
The new rules also create additional checks and processes when making a claim and so businesses should seek professional advice from experienced R&D tax advisers when assessing R&D projects.
As claims are based on a company’s year-end some businesses may wish to accelerate claims to before the new PAYE Cap by amending their year-end. Businesses should be aware, however, that this may affect other parts of their tax affairs, including other reliefs.
Last year, our specialist R&D tax credit team helped businesses, including many innovative tech companies, to claim more than £3 million in relief.
We are supporting businesses with this recent rule change and are helping them to find the most successful path to funding via this scheme.