Government concern about abuse of SME R&D tax credits has resulted in a cap on the amount of relief that can be claimed in any period. We look at what this could mean for smaller businesses.
What is SME R&D tax relief?
In its simplest terms, R&D tax relief allows companies carrying out R&D to offset the cost of the activity (materials and labour) against their tax bill and claim a cash lump sum on top.
SME R&D relief provides an enhanced deduction against profits for R&D revenue spending of 130% for companies making a profit. This is on top of relief for the actual expenditure, effectively providing up to a total 230% deduction.
Loss-making companies have the option to surrender a loss in exchange for a cash repayment. This is currently calculated at 14.5% of the surrendered loss.
R&D tax relief can be a missed opportunity for smaller companies who, on occasion, carry out an innovative scientific or technological project that advances their business, without realising the activity could qualify for relief.
In the context of R&D tax relief claims, an SME is a UK limited company, subject to UK Corporation Tax, with fewer than 500 staff, and a turnover of under 100 million euros (or balance sheet total under 86 million euros).
Background to the R&D tax credits cap
From 1 April 2021, SME R&D tax credit will be capped at £20,000 plus three times the total PAYE and National Insurance contributions (NICs) liability for the period.
The PAYE/NICs bill to look at is not just the bill for those involved in the R&D work. It applies to the company’s entire spend on PAYE and NICs, as well as the PAYE and NICs of connected persons carrying out subcontract R&D for, or supplying workers to, the company.
The measure is not intended to penalise genuine claimants and companies claiming a payable credit less than £20,000 will not be affected. If the company meets two tests, a claim of any size will not be capped.
The two tests of eligibility for SME R&D tax credits
The conditions for a company are:
- that its employees are creating, preparing to create or managing intellectual property and
- that less than 15% of its R&D qualifying expenditure is spent with connected persons.
HMRC scrutinises R&D claims thoroughly and being able to substantiate your R&D expenditure is particularly important.
Although there are no recordkeeping requirements specific to R&D tax relief, it’s important keep in mind the overarching obligation to keep sufficient records for Corporation Tax. This is likely to mean payroll records, work-logs or timesheets and invoices from anyone providing you with labour, such as agency workers.