The government has extended the closing date to its second consultation, 'Preventing abuse of the R&D tax reliefs for SMEs'. The closing date is now 28 August 2020.
HMRC have identified fraudulent claims worth over £300 million in total, involving companies that were set up to claim payable tax credit even though they undertook no Research & Development (R&D). Additionally, HMRC have identified a number of structures where R&D expenditure outside the UK had been re-routed through a UK entity. These entities have little or no employment or activity in the UK and are set up wholly or mainly for the purpose of accessing the tax credit.
To prevent abuse of the SME scheme, Budget 2018 announced a restriction on the amount of R&D payable tax credits.
Following its 2019 consultation, the government proposed that from April 2021, as delayed from April 2020:
- The amount of payable credit that a qualifying loss-making business can receive through R&D relief in any one year will be capped.
- The cap will be three times the company’s total PAYE and NICs liability for that year.
- Claims below £20,000 will not be subject to the cap.
- Relevant related party PAYE and NICs can be taken into account when calculating the cap.
Summary of consultation and questions
The 2019 consultation did not consider the role of Externally Provided Workers (EPWs) in R&D subcontracting. Government proposes allowing for related party liabilities in the cap calculation to include EPWs provided by a related party. EPWs are workers employed by one company, for example, an agency but provided to the company carrying out the R&D.
Question 1: Does your business subcontract to a related party or use EPWs provided by a related party? Would it be useful to be able to include the PAYE/NICs attributable to these workers in your payable credit?
Question 2: Would it be practical to obtain information on attributable PAYE/NICs from EPW providers in order to increase the level of your cap?
The government believes that where a claimant company can provide proof that they are actively managing the intellectual property arising from, or expected to arise from, the R&D project, then this is a marker of a genuine business. This could provide assurance that a claim for the credit could be uncapped.
Question 3: The government welcomes views on the sorts of activities which are undertaken to manage IP, as well as the types of information and evidence of the active management of intellectual property, which a genuine business would be able to provide in supporting their R&D tax relief claim.
To ensure that only genuine businesses can have their credit claims uncapped, the government intends to apply a test which allows for a limited proportion of R&D expenditure on subcontracting to, and provision of EPWs by, related parties. As the intention of this test is to ensure genuine businesses are able to have their claim uncapped, the government would like to test whether some genuine businesses subcontract to related parties and to related EPW providers.
Question 4: Does your business subcontract work to a related party, (including using EPWs provided)?
As some genuine businesses may subcontract to related parties or for the provision of EPWs, the government is considering allowing for a low level of related party subcontracting. The government proposes setting the limit of subcontracting between related parties at 10% of overall R&D expenditure used in an R&D SME payable credit claim and welcomes views on whether this is an appropriate level.
Question 5: Where your business does subcontract to a related party, does this represent less than 10% of R&D expenditure? If no, please provide an indication of the percentage of your claim related party subcontracting does represent.
HMRC's consultation, HMRC Preventing abuse of the R&D tax relief for SMEs, Second consultation runs from 19 March to 28 August 2020.
Responses should be sent by email to:
Useful guides on R&D
R&D Tax Reliefs: At a glance
What's Research and Development (R&D) relief? How to claim R&D relief? Small company R&D relief explained? Can individuals claim R&D relief?
R&D: SME Tax Credit Scheme subscriber guide
What Research & Development (R&D) schemes can be claimed by R&D? How to make an R&D claim?
R&D Zone
Worked examples and case studies covering SME and large company R&D claims.