Changes to the payable R&D tax credit
The RDCC (Research & Development Consultative Committee) took place virtually yesterday and our Technical Director was in attendance.
The RDCC meets twice a year to discuss the operational delivery of the Research & Development (R&D) tax relief schemes.
Its membership includes agents, professional bodies, delegates from the industry and the main business, technical and trade bodies, and representatives from HMRC who have policy and operational responsibilities for R&D tax credits.
There were many interesting topics on the agenda, one of which was the “PAYE Cap” to the payable R&D Tax Credit.
The payable Tax credit is claimed when a company makes a loss for corporation tax purposes after the additional R&D costs have been deducted.
The loss from the R&D deduction can (with some restrictions) be ‘surrendered’ in return for a payment of an R&D tax credit. The payable tax credit is then 14.5% of the loss surrendered.
The PAYE Cap was proposed after HMRC identified (and prevented) fraudulent attempts to claim the SME scheme payable tax credit totalling over £300 million. In these cases, companies were set up to claim the cash available through the payable credit even though they had no R&D activity.
As a result in the 2018 Budget announced that, to deter abuse, the amount of SME scheme payable tax credit that a business can receive in any one year will be capped at three times the company’s total PAYE and NICs liability.
The government consulted on the application of such a cap in Spring 2019. Following considerations of the consultation responses, the government announced at Spring Budget 2020 that changes would be made to the PAYE cap design to minimise the impact on genuine businesses.
It also announced that implementation of the cap would be delayed until April 2021 to allow for further consultation on the changes.
The design of the cap has subsequently been proposed as follows:
To claim more than £20,000 of payable tax credit, a company’s maximum claim is calculated by multiplying its entire PAYE and NICs liability for that year by three and adding this to the £20,000 threshold (£20,00+ 3*PAYE/NICs).
For R&D Tax Credit claims below £20,000, the PAYE cap will not apply. This will protect companies with the smallest claims, whilst also ensuring the PAYE cap remains effective at targeting abusive behaviour.
This change is something that Invo Capital has followed closely. In fact, our proactive approach, the Invo Pathway, means we are uniquely positioned to ensure that companies are prepared for such pivots. As always – planning and strategy is key!