R&D Tax Relief to be capped from April next year

12th November 2020

From 1 April 2021 Research & Development (R&D) Tax Credits will be capped, in a measure unveiled as part of next year's Finance Bill.

We have previously welcomed the delay in the implementation of a cap.

The cap will affect companies that carry out R&D who claim the payable R&D tax credit for companies which are small or medium sized enterprises (SMEs).

A limit will be placed on the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.

A company is exempt from the cap if:

  • its employees are creating, preparing to create or managing Intellectual Property (IP) and
  • it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

While this percentage will help to prevent the cap from applying in some cases, there will be companies undertaking genuine R&D activity that may still be affected by it.

Of paramount importance for companies, therefore, will be the evidence to support their claims, ensuring robust internal documentation and correspondence.

This needs to be accompanied by clear guidance and supervision from HMRC.

Accounting year end straddles 1 April 2021

On 25 November 2020, HMRC made clear that the measure takes effect for accounting periods beginning on or after 1 April 2021.

So where a company has an accounting period beginning before, and ending on or after that date, they will be treated as two separate periods and the cap will apply to the period from 1 April 2021.

R&D

R&D tax credits incentivise companies to invest in R&D and are a key part of the government’s support for innovation.

The SME payable R&D tax credit provides valuable support to loss-making companies. It allows them to claim a tax credit worth up to 14.5% of the R&D element of their surrendered losses and receive an immediate cash-flow benefit.

However, the government says the tax credit has become a target for fraud and abuse, hence its response with a cap on claims.

It has previously consulted on the measure before publishing the draft legislation.

New tax return pages for R&D

From 1 April 2021, all companies submitting a claim for SME R&D Relief, SME Payable Tax Credit and/or for R&D Expenditure Credit will have to complete a supplementary page, the CT600L, when submitting their corporation tax self-assessment or making any amendments.

HMRC has issued a draft CT600L and guidance to cover the page via the ATT.

The entries currently required in the main CT600 return will still be required, although HMRC anticipates that where these entries are duplicates of the figures in the CT600L software will automatically populate duplicated boxes.

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