R&D tax credits are vital to any innovative company – they enable you to continue funding the development of your product, service or solution. When it comes to calculating how much cash you’ll receive back, it will depend on whether you’re eligible under the SME R&D tax credit scheme or large company Research and Development Expenditure Credit (RDEC). How much you receive back will also depend on how much you’ve spent on eligible expenditure such as for materials or software. For more detailed information on calculating your R&D tax credit we recommend reading “What costs can I recover through R&D?”.
During the 2018 Autumn Budget, it was announced that a new proposal would reintroduce a cap on R&D tax credits in order to tackle fraudulent claims where companies have been set up in the UK but little or no activity takes place in the country. The original cap that was put in place limited the maximum you could claim back in tax credits to the equivalent amount of the company’s qualifying PAYE and NIC costs but this rule was scrapped in April 2012.
The new cap which is due to start in April 2020 only affects loss-making companies who are claiming through the SME R&D tax credit scheme (not the RDEC scheme). It is slightly more generous than the original cap in that it will allow the maximum to be claimed to be three times the amount of a company’s qualifying PAYE and NIC liability. Despite the leniency compared to the 2012 rule, it is predicted to particularly hit hard at start-ups and smaller companies who may be more reliant on contractors to carry out their R&D work. It will also affect those companies who outsource their clinical trials to hospitals and universities which is common practice for many in the Biotech sector.
The proposal is still in consultation and considerations are being made towards genuine smaller R&D companies. Possible initiatives to alleviate the burden include granting a de minimis threshold which would allow companies to claim more than their PAYE and NIC cap so long as it falls below the threshold. Other possibilities to make the cap fairer include allowing a company to carry forward the losses that have been blocked by the cap in future years.
In practice what this really means is that you should carry on calculating your R&D claim as per the normal calculations. Where the amount due back to you is more than what you need to pay in three times your PAYE and NIC you will not be able to claim the remaining difference. This will only apply to you if your company is expecting to make a loss. Our advice is that when planning your budget for next year, where possible, you allocate more to hiring in-house in order to allow yourself a larger R&D tax credit claim. If you’d like any further advice or would like to discuss please give us a call to set up a free consultation on 01865 245511.