14 Oct 2020 10:01 AM

R&D relief is a tax incentive available to UK companies doing R&D (Research and Development) work.  There are two types of R&D relief: the SME scheme and the RDEC scheme, with companies being eligible for one or the other depending on their size and whether or not they receive external grant-funding for their R&D work.

Clients and contacts often ask us questions about R&D relief, so here is a typical ‘question and answer’ scenario, based on the proposed new R&D relief restriction relating to PAYE and NIC payments.

 

Q.  My company could really do with a R&D tax refund now  -  but wasn’t that going to be restricted from April 2020 onwards and how does the restriction work?

Yes, indeed, there was an announcement in the Autumn 2018 Budget that R&D relief would be restricted from April 2020 onwards by reference to the company’s PAYE and NIC payments, but these proposals only applied to the SME R&D relief scheme, as there are already PAYE-based restrictions in place for the RDEC scheme.  The start-date for the SME scheme restrictions would be the first accounting period beginning on or after 1 April 2020.  For a company with a December year-end, this would therefore start on 1 January 2021.  For a company with a March year-end, it would start on 1 April 2020.

Q.  So does that mean that the new rules have already started for some companies?

No, the new rules haven’t actually started.  The reason for this is that the legislation hasn’t been put into place yet.  In October 2018, HMRC announced that there would be a public consultation relating to the PAYE restriction, so the R&D changes were therefore not included in the Finance Act 2019 which became law in February 2019.  The R&D consultation lasted from March to May 2019.  Following on from that, it was originally intended that the new legislation would be introduced soon afterwards.  Another Finance Bill was issued in October 2019 (including various tax measures from the Autumn 2018 Budget) but it was shelved in November, in the run-up to the Election, so the R&D measures proposed in October 2018 have not yet been finalised and become law.  It was thought that the new rules might be introduced in the March 2020 Budget but, for a number of reasons, that turned out not to be the case.

Q.  So when will the new rules be introduced and what are they?

In the March 2020 Budget, it was announced that the new rules have been delayed by a year and will now apply from 1 April 2021 onwards. In conjunction with the Budget announcement, the Government published a summary of the responses received during the 2019 consultation.  The aim is still that the amount of the ‘payable tax credit’ tax refund a qualifying loss-making business can receive will be capped at three times the company’s total PAYE and NIC liability for the year concerned.  It therefore appears that this is a restriction not on the amount of R&D losses that a company can claim but on the amount of those losses that it can surrender in order to receive a tax refund.

The 2019 consultation concerned the design of this new measure and how the cap would be put into effect, for instance:

  • how this would apply to groups of companies,
  • whether or not there should be a threshold,
  • whether carried forward losses should be allowed to be surrendered to receive payable tax credits in future years,
  • the consideration of possible exemptions, etc.

As a result of this consultation, it has now been announced that the Government:

  • proposes to include a £20,000 ‘surrendered loss’ threshold below which the cap will not apply,
  • proposes to introduce a total exemption for some companies,
  • will also allow companies to take into account R&D-related PAYE and NIC liabilities of related parties, but
  • will not allow the expenditure of one period to give rise to a ‘payable tax credit’ repayments in future periods.

The exact details have not yet been worked out and a further consultation is now in place, due to close on 28th May 2020.

A new consultation on the PAYE cap was launched on 19 March 2020 and closed on 28 August 2020.

Further details will be announced by the Government in due course, with the aim being to introduce the new legislation for accounting periods beginning on or after 1 April 2021.

At Alliotts we have considerable experience of preparing R&D relief claims.  If you would like further details, please contact us to discuss how we can help your company.