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The 2018 Budget announced some proposed changes to the repayment of R&D tax credits for small and medium-sized businesses. How will these proposals affect you?

What is R&D relief currently worth?

Research and development (R&D) tax credits provide an enhanced corporation tax deduction for companies that incur qualifying expenditure. The rates of R&D relief have generally have been increased over the years and can be claimed by even more companies since the £10,000 minimum spend was abolished on 1st April 2012.

Claiming Relief

Since 1st April 2015 for every £1 of qualifying R&D expenditure, an additional £1.30 is allowed in the SME's corporation tax computation as a "super deduction". This means that the total tax relief equates to 230% of the actual R&D spend.

What’s changing?

The R&D tax credit that companies can claim is currently unrestricted.

The current proposal, as announced at the 2018 budget, is that for accounting periods starting on or after 1st April 2020 the R&D tax credit will be capped at three times the loss-making company's PAYE/NI bill for the accounting period. The proposal is that any excess losses must be carried forward and offset against future profits which may take considerable time.

Reasoning

HMRC says the cap is required to reduce instances R&D claims and situations in which there are repayments being made to companies where minimal R&D activities take place in the UK in reality.

How it works now

Example

A company has qualifying R&D expenditure of £8,000. As a result, it will be entitled to claim a tax deduction of £18,400 (£8,000 x 2.30). Assuming corporation tax on profits is paid at 19%, this will result in a tax saving of £3,496 - 43.7% of the R&D spend.

The SME in this example should be able to claim a cash payment, known as an R&D tax credit, instead. There's currently no limit to the amount that can be claimed and since 1st April 2014 the rate of tax credit is 14.5% of the surrendaible loss.

Example

A loss making company that has spent £8,000 on R&D could claim a tax credit of up to £2,668 (£8,000 x 2.30 x 14.5%), equivalent to 33.35% of the R&D spend.

After the proposed changes

Example

A company spends £100,000 on R&D in 2022. The SME R&D relief increases its loss by £130,000 so, under the current rules, the company is able to surrender the £230,000 loss for a 14.5% payable tax credit of £33,350 (equal to £100,000 R&D spend x 33.35%). However, in the same accounting period, the company has a PAYE/NI bull of £5,000 as most of its staff are subcontractors.

In the absence of any minimum threshold, the maximum repayable tax credit would be £5,000 x 3 = £15,000. This is equivalent to surrendering losses of £103,448 (£103,448 x 14.5% = £15,000). The company would be able to carry forward the remaining £126,552 against future profits. It is possible that the company may also be able to surrender some of that carried forward loss for a payable tax credit.

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