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Research and development (R&D) tax credits – a topic for our time

At PKF Francis Clark we have worked on a significant number of R&D tax credit claims with our clients over the course of the year.

As we move into 2021, I see that number increasing as businesses look to innovate to mitigate risks and maximise opportunities arising initially from longer term impacts of Covid-19 on their business and then climate change / sustainability.

Over the years we have written a number of blogs on R&D tax credits and I have included links to some of these below as the salient features of the relief and the assistance that we can provide remain valid:

So, what’s new?

There are several new issues surrounding R&D tax credits as I look forward to 2021 (and it should be noted that this piece was written pre the Chancellor’s spending review)

1.     More R&D = more R&D tax credit claims

As indicated above I anticipate an increasing number of companies undertaking R&D in the next twelve months – perhaps as they look to pivot their business models as a result of changing customer buying habits as a result of Covid-19, or the desire to “grow back greener”.

2.     State aid questions

Another implication of Covid-19 is the significant increase in the number of companies that have received state aid or something that looks like it. I am already seeing requests for additional information on state aid by grant awarding bodies – and it should be noted that R&D tax credits are classified as state aid.

The classifications of state aid (de minimis v notified etc) and the interactions and implications of it, is not the subject of this blog but it is a subject I feel we will return to. What I would suggest recipients of aid do is log the amount received, the date received and look at the documentation (grant offer letter etc) and if it includes the category of state aid, note this on the schedule. Then when you apply for, for example, a grant for R&D, you should at least be prepared for any questions around state aid.

3.     More R&D grants = more questions on the interaction of R&D grants and R&D tax credits

As the UK Government looks to encourage more R&D through grant funded programmes, I anticipate more conversations with clients as to interaction of grants for R&D and R&D Tax Credits. This is an area we are well versed in and recommend clients speak to us at the earliest opportunity.

4.     Cap on the amount of payable small or medium sized enterprise (SME) R&D tax credit which a company can claim in a period

When the R&D tax credit system was first introduced for SMEs it included a PAYE / NIC liability cap – this meant that the repayable tax credit could not exceed the amount of PAYE / NIC paid by the company for that relevant accounting period.

The cap was removed in 2012, but more recently HMRC has become concerned that the absence of the cap was leading to companies not intended to benefit from R&D credits receiving significant cash payments.

The Government consulted extensively (in 2019 and again this year) and after considering all the views put forward, it is now confirming that the design of the PAYE cap. The amount of payable small or medium sized enterprise (SME) R&D tax credit which a company can claim in a period will be limited to £20,000 plus 300% of its total PAYE and National Insurance contributions liability for the period.

The cap will include the following features to minimise the impact on businesses:

  • A company making a small claim for payable credit below £20,000 will not be affected by the cap
  • A company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap – and these will be subject to the 300% multiplier
  • A company’s claim, of any size, will be uncapped if it meets two tests. These tests require that:
    • a company’s employees are creating, preparing to create or actively managing intellectual property (IP) and
    • that its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure

The bottom line is that many SMEs which previously paid their owner managers very little in the way of salary, but were able to use external contractors to execute the R&D projects, may now not be able to obtain a repayable tax credit and will instead have to carry forward the relief as an enhanced loss until and if the company becomes profitable.

The changes to R&D SME tax relief will be legislated in the Finance Bill 2021 and will affect accounting periods beginning on or after 1 April 2021.

I have not looked back though our portfolio of claimants of payable credit, but I do not think many of our clients will be negatively affected by the cap going forward.  Where they potentially are affected there will I am sure, be discussions on potential reorganisation of their R&D activities to see if changes to business operations to enhance the repayment claim are commercially sensible.

PKF Francis Clark

Even with the potential of a claim of payable credit being capped, R&D tax credits remain a valuable relief to have. We see huge opportunities for clients in lots of sectors including agribusiness, marine and construction as well as the more usual manufacturing, engineering, software and food & drink sectors.

A lot of businesses still don’t believe R&D tax credits would apply to them, but we help businesses of all sizes and sectors realise that they can claim for R&D. As a firm we are committed to supporting our clients to make sure that we maximise relief value, providing a significant cash flow boost – which is likely to be of increasing importance as we enter 2021.

 If you would like to talk to someone about a potential R&D tax credit claim please do not hesitate to contact me or your usual PKF Francis Clark adviser.

FEATURING: Stuart Rogers
Stuart is a corporate tax partner who specialises in advising fast growing and complex corporate entities, heading up the innovation and technology tax services group… read more
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