The Chancellor announced in his Budget speech that a reform to the ‘SME’ scheme of R&D tax credits will be made with effect from April 2020. Under the scheme as it currently works, a loss-making company can ‘cash in’ its R&D tax losses in exchange for a ‘payable credit’ from HM Revenue and Customs. However, from April 2020, the amount of ‘payable credit’ that a company can receive under this mechanism will be capped to three times the company’s total PAYE and NICs liability for that year.
This restriction is being introduced to help prevent abuses of the scheme. HMRC has apparently identified and prevented attempted frauds on the scheme worth £300 million in total, which involved companies being set up to exploit the payable credit opportunity even though the companies concerned had no legitimate R&D activity and/or little, if any, employment or activity in the UK.
The government acknowledges that some genuine UK R&D companies could be adversely affected by this move. A consultation will therefore be published to consider how to apply the cap to minimise any impact on such businesses.
Businesses that could suffer from this move include, for example, relatively young companies which may outsource their R&D activities to subcontractors and specialists as they may have insufficient resource ‘in house’. Such businesses often have limited staff, and the owner managers often take only a small salary (if any) until the business becomes established. In such circumstances, the company’s PAYE and NICs liability would be relatively insignificant; even at three times that liability, the capped payable credit would mean that there would be little, if any, cash arising from an R&D tax credits claim.
Although it is proposed that the company could still carry forward unused R&D tax losses to set against future profits (as is already the case), this is unlikely to instil much interest in a young R&D-intensive business in need of immediate cash to survive and grow. It is to be hoped that the consultation will apply some relaxations or exemptions from the cap in such circumstances, such that it is more accurately targeted at abusive cases.