25TH JANUARY, 2021

R&D Tax Credits To Be Capped From April

Making genuine claims easier whilst preventing fraud

As part of the 2021 Finance Bill, the government is capping research and development (R&D) Tax Credits from the 1st April 2021.

The R&D Tax Credits scheme in brief

The government is keen to encourage UK companies to innovate and grow. It’s an important part of strengthening the economy, which is why R&D Tax Credits exist. The scheme works by allowing UK companies undertaking eligible R&D projects to claim back a large proportion of their expenditure.

Research and development takes many forms and can be found in every industry and sector. Although R&D Tax Credits can be claimed by any company regardless of size, big claimers include the engineering sector, aviation, manufacturing, pharmaceuticals, agriculture, construction and many more.

Companies will claim either under the SME branch of the scheme or RDEC. The SME branch is the more generous one, although RDEC claims by their nature tend to be much more substantial. It works by allowing companies to claim a tax credit worth up to 33 pence for every £1 of R&D expenditure, which is used against their Corporation Tax bill. Companies that have made a loss can receive the award in cash payments instead. So whether the company is profitable or not, a swift and generous boost to cash flow can be achieved.

Find out more detail on our R&D Tax Credits page.

What is the cap?

The cap will mean that from April SMEs will only be able to receive R&D Tax Credits to the value of £20,000 plus three times the total NIC and PAYE liability of the company for that year. Claims of less than £20,000 are unaffected.

Additionally, companies may include “related party” NIC and PAYE liabilities relating to the R&D project when they calculate the cap. Furthermore, genuine claims of any size will still be allowed as long as they can demonstrate:

  1. That the company’s employees have been genuinely managing, creating or preparing to create intellectual property.
  2. That the use of subcontractors is related to R&D only

The idea behind this is twofold - enhanced protection for genuine claimants whilst making it much harder for rogue operators to claim cash for bogus R&D work.

Who will the cap affect?

The cap will affect those claiming under the SME branch of the scheme specifically.

Why is the cap on R&D Tax Credits needed?

The R&D Tax Credits scheme has been around since the early 2000s in various forms. It’s a highly valuable, popular tax incentive which in the current economic is more important than ever. However, sadly it has sometimes been the target of fraud and abuse, hence the government’s response to put a cap on claims.

When fraudulent claims for R&D Tax Credits are made, it ultimately prevents SMEs and start-ups from accessing much-needed innovation funding. Unfortunately, by March 2020 more than £300 million had already been fraudulently claimed for the year. HMRC also identified a number of companies that had been set up purely to claim R&D Tax Credits even with no legitimate UK activity beforehand. The cap is intended to help stop this.

Preventative measures against such fraud are welcome, not least because it can seriously damage SME trust in the scheme too.

Are there any exemptions from the cap?

Companies can be exempt from the new cap if:

  • Their employees are creating, managing or preparing to create Intellectual Property (IP) and
  • No more than 15% of its eligible R&D expenditure is made on subcontracting R&D to, or providing externally provided workers (EPWs) by, connected individuals

Note that although these rules are designed for fairness, some companies undertaking genuine R&D work may still be affected. This is why it’s so important to evidence absolutely everything to support your R&D tax relief claim. Robust procedures in record-keeping and internal documentation are essential.

See the government’s policy paper: Preventing abuse of Research and Development tax relief for small and medium-sized enterprises.

What happens if my accounting year end straddles the 1st April 2021?

The new cap only takes effect for accounting periods that start on or after the 1st April 2021. Dates either side of this will be regarded as two separate periods, with the cap only applying to the period from 1 April 2021.

New CT600L

From the 1st April 2021, all companies applying for R&D Tax Credits will also need to complete a supplementary page called the CT600L. This should be included when submitting their Corporation Tax self-assessment or when they make any amendments. Further guidance is expected in the coming weeks.

How the Tax Cloud portal is taking the headache out of R&D Tax Credit claims

Although the R&D Tax Credits scheme is exceptionally generous, it’s no secret that applying for the relief is extremely tough. This is even the case for companies who’ve applied many times before, or whose tax affairs are relatively straight-forward.

All R&D projects are unique, and guidance in this area is updated regularly making expert advice crucial. HMRC are also hot on identifying mistakes, often leading to stressful enquiries and even legal action.

Tax Cloud offers fully guided, cost-effective online tool that takes you through your R&D Tax Credits claim in easy to follow steps. When compared to our full service offering, it’s outstanding value for money too as the inputting is done yourself.

Using Tax Cloud means you can easily check your progress as you go along. The next step only ‘unlocks’ once our experts have checked everything for you so far, so you know you’re on the right track. It’s cloud-based too so ideal for remote working on any device. You don’t even have to leave your sofa to claim what could easily be thousands of pounds in extra cash.

Find out more about how the Tax Cloud portal works by visiting our recent blog article: Why Your Business Needs Tax Cloud.

Sign up today

Totally free to sign up and use, why not log on to the Tax Cloud portal for businesses now and get your claim started. And of course, if you need any help or support along the way our team are always on hand to help - see our contact page.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
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Rabia Mohammad Rabia Mohammad Corporate Tax Associate