R&D tax credits anti-abuse measures confirmed
17 November 2020: Draft legislation confirms a new cap to reduce the number of fraudulent claims for research and development tax credits by SMEs, largely in line with consultation proposals.
Published with a slew of other tax announcements on 12 November, the new rules would cap the repayable element of R&D tax credits an SME is able to claim for an accounting period.
The cap is set at £20,000, plus 300% of its total PAYE and NICs liability for the period concerned. This includes the PAYE and NIC liabilities of any connected persons undertaking subcontracted R&D for, or providing workers to, the company.
The draft legislation contains specific provision to prevent such liabilities being “double counted” (ie, counting towards more than one company’s cap).
However, a company is exempt from the cap if two conditions are met:
- A. its employees are creating, preparing to create or managing intellectual property (IP); and
- B. it does not spend more than a certain percentage of its qualifying R&D expenditure on subcontracting R&D to, or on the provision of externally provided workers by, connected persons. That percentage is 15%, an increase from the 10% originally proposed in the March 2020 consultation document.
While the increased percentage will help to prevent the cap from applying to certain claims, some companies undertaking genuine R&D activity may still be affected by it.
The legislation seeks to define condition A and includes activities such as management time spent ‘formulating plans and making decisions in relation to the development or exploitation of the IP’
ICAEW’s Tax Faculty has expressed concern previously that providing evidence to support condition A is likely to hinge on internal documentation and correspondence which is in itself open to abuse. Careful HMRC guidance and supervision is going to be needed to manage the operation of this exception in practice.
There is also concern that this requirement might lead to increased professional and compliance costs for companies undertaking genuine R&D.
The measures will be included in Finance Bill 2021 and will apply to accounting periods beginning on or after 1 April 2021.