R&D payable credits – an extra year of uncapped claims

HM Treasury has delayed the introduction of the proposed cap on R&D payable credit claims under April 2021.

We announced in our article of August 2019 that Budget 2018 had intended to introduce a potential cap on research and development tax credit claims. 

The proposed intention was to deter abuse of the regime, capping the payable credit to qualifying loss-making businesses at three times the company’s total PAYE and NICs. This was due to come into force in April 2020.

However, in a welcome move, HM Treasury have delayed the introduction of this cap until April 2021. 
The Government’s first consultation on the rules is complete, and made some key decisions:

• The cap will only apply on claims worth more than £20,000 (and in those cases the cap would only apply on the excess over £20,000)
• The PAYE/NICs of connected parties will be included in the calculation 

There has also been a second consultation announced, which looks to give additional protection to genuine businesses which would be impacted by a cap. 

The proposal is for businesses displaying ‘hallmarks’ of R&D to make claims outside of the cap. At present, HM Treasury are suggesting that active management of intellectual property (IP) is a key ‘hallmark’ of R&D.

The inconsistency here is that HMRC currently take the view that IP should be owned in order for an R&D claim to be made. If owned IP is not also being managed and developed already, then an R&D claim may not be possible regardless; this hallmark would not therefore seem to break any new ground. 

However, there is also to be a second leg of the test which says that businesses passing this active management test will have uncapped claims, provided that no more than 10% of a company’s R&D expenditure is on related party subcontracting or related party externally-provided workers.  

This second leg of the test is apparently linked to a concern about the use of subcontracting structures in particularly abusive R&D cases. Our fear here, though, is that this test, if incorrectly legislated for, could harm normal commercial group structures. The reality is often that people are employed and carry on R&D in different entities but the R&D claimant is one company only; would the 10% test really apply to the costs of those other employees? 

We welcome the Government’s second stage consultation, and them acknowledging concerns from the business community, including our own, about putting a cap on genuine R&D tax credit claims. 

The principle of an uncapped threshold is particularly useful, but £20,000 is not a sum which will enable businesses, especially start-ups, to recruit the additional staff they need to develop, finesse and market a product. Indeed, in the current climate, the jeopardy of on-payrolling is surely the highest it has ever been; businesses are much more likely to favour subcontracting arrangements when the economy restarts in earnest. 

So, is this good news, overall, for businesses carrying on R&D? The answer is yes, probably.

The delay of one year is at least helpful.

Could it be better? Undoubtedly so and perhaps the increase in the RDEC rate for large companies by 1p per £, at a predicted cost of £300m per year to the Exchequer, explains why SMEs are going to be taking a hit.

Our fear though is that the commercial reality of R&D in the UK is not that well understood by HM Treasury, hence the need for another consultation.