What do new rules around R&D tax relief mean for small and medium-sized enterprises?

Government concern about abuse of small and medium-sized enterprise (SME) R&D tax relief means that with effect from 1 April 2021, there is a cap to the amount of payable SME tax credit which can be claimed in any period. Assuming that the proposals go through as anticipated, this will be £20,000 plus three times the total PAYE and National Insurance contributions (NICs) liability for the period. The PAYE/NICs bill to look at isn't just the bill for those involved in the R&D work. It applies to the company's entire PAYE and NICs spend, as well as the PAYE and NICs of connected persons carrying out subcontract R&D for the company, or supplying workers to the company.

The measure is not intended to penalise bona fide claimants. Companies claiming a payable credit less than £20,000 will not be affected. And if the company meets two tests, a claim of any size will not be capped. The conditions 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. Though there aren't record keeping requirements specific to the relief, the overarching corporation tax requirement to keep sufficient records should be borne in mind. In an R&D context, this is likely to mean payroll records, work-logs or timesheets and invoices from anyone providing you with workers, such as agency workers. We should be delighted to help you check the detail of your expenditure and claim.

For those new to the regime, an SME, for R&D tax relief purposes, 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). For companies making a profit, SME R&D relief provides an enhanced deduction against profits for R&D revenue spending of 130%. This comes 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 is sometimes said to be a missed opportunity for smaller companies, which could, on occasion, undertake an innovative scientific or technological project advancing their business, without realising the activity could qualify for relief. If this prompts you to take stock of your own business activities, please don't hesitate to contact us for an in-depth discussion.