Understanding the 2018 Autumn Budget’s R&D Tax Credit Cap
Bad news for small research businesses which don’t make a profit – the government is capping the amount of tax they can claim back to help cover the cost of their work.
In last month’s Budget, the government announced it was limiting the amount of research and development tax credits SMEs which make a loss can receive. They will now only be allowed to claim back an amount equivalent to three times their combined pay-as-you-earn and national insurance contributions each year.
If you’re a small startup with few or no employees, perhaps because you can’t afford to put many people on your payroll, this is bad news.
HMRC says the change is needed to combat malpractice after it identified £300 million of attempted SME research and development tax fraud.
“Companies were set up to claim the cash even though they have no legitimate R&D activity,” the Treasury explained. “HMRC also identified structures set up deliberately to claim the tax credit despite having no or little employment or activity in the UK.
“This will deter abuse because fraudulent companies typically do not employ many people or pay PAYE and NICs. The cap will therefore ensure that the relief goes to companies that have a real UK presence.”
It added that 95 per cent of SMEs which claim research and development tax credit will not be affected. The cap will be brought in in April 2020. A previous cap was removed in 2011.
“Genuine companies affected by this will still be able to claim credit up to the cap, with any unused losses carried forward to be set against future profits. The government will also consult on how the cap will be applied, to minimise any impact on genuine UK businesses,” the Treasury added.
Evgeni Vachkov, Directorhere at R&D Tax Solutions, says: “The government said in its own statement that research and development tax relief is designed to encourage innovation. The UK’s small businesses are at the heart of that – and they’re also the ones who need the most financial support. Small businesses often simply aren’t in a position to take on permanent staff.
“Obviously we understand why the government is taking this step as no one wants to see the money going to people who have no right to it – but proper investigation of claims to ensure they are bona fide is surely a better idea than withdrawing support from genuine claimants.
“We hope the government will consult properly on this change so that the policy does what it is designed to do, while still supporting our brightest brains in their important work.”
If you’re worried that your company will be affected by the cap, or if you’d like to find out if you’re eligible for r and d tax credit either through the SME scheme for small businesses or the RDEC scheme for larger enterprises,we can help. SMEs can get up to a quarter of their costs back – have a look at our r&d tax credits examples here –and as research and development tax specialists, we can do the work on your r&d tax claim for you. Call us at our Manchester office on 0161 298 1010.