Research and Development Tax Credits (RDTC) were introduced in 2000, designed to incentivise research and development through reduced corporate tax or payable credits. The government estimates that for every £1 of tax the Treasury forgoes via RDTC, between £1.53 and £2.35 of additional R&D is stimulated.
RDTC have been a key plank of HM Treasury’s Business Tax Roadmap and have seen material improvements year on year since 2000, making the scheme ever more lucrative.
But for the first time we are facing a tightening of the regime. Budget 2018 announced that to deter abuse of the regime, the payable credit to a qualifying loss-making business would be capped at three times the company’s total PAYE and NICs. This is due to come into force in April 2020.
In March 2019 HM Treasury issued a consultation document on these proposals, the outcome of which should be known later this year.
Whilst supportive of measures to tackle abuse of the RDTC system, I am concerned that this measure is a blunt device that will hurt genuine SMEs in the early stages of their life-cycle – just when they need that crucial financial support that RDTC provides. Early stage SMEs tend to contract out R&D, as they do not have the resources to build a full R&D team. They correspondingly have a much smaller PAYE/NIC bill across a year – and hence the cap will unfairly disadvantage them.
There is no doubt abuse in the system, but not through the fault of the companies who know little of the workings of the regime (and which is why HMRC are trying hard to raise RDTCs profile). They rely on the advice from the myriad of R&D advisors who are understandably and proactively marketing this regime. The problem in the sub-contracting scenario is that effectively two companies are involved in the R&D hence two claims could potentially present.
In my view this is easily resolved – HMRC should be clearer on the connection between IP ownership and a company’s entitlement to claim. i.e. if the company rightfully owns or shares in the IP arising from the R&D then it should be able to claim. The R&D inspectors will tell you that the claim vests where the IP sits – but this does not explicitly present in either the legislation or the guidance. If you are sub-contracting your R&D and are developing IP then you are creating two areas of employment – for the sub-contractor, and for the claimant who is developing IP which if successfully developed and exploited, will generate further employment.
At a time when SMEs are facing an uncertain future, and the spectre of European funding and grants falling away, the RDTC regime will increasingly represent a mechanism to facilitate greater funding to the knowledge economy. Countering abuse enables more funding for genuine claimants – assuming the measures to counter it haven’t killed them first.
Companies need to consider clearly demonstrating their ownership of the IP; and whilst HMRC are taking ownership of abuse, it is ownership of IP they really need to be focusing on. Some of the questions in the consultation document demonstrate a worrying lack of understanding in HM Treasury of the RDTC landscape and its operation. I hope this does not foretell of stormier times ahead for RDTC.