2020 Update: It was announced in the March 2020 budget that this anti-abuse measure is under review and will be deferred until April 2021.
Phillip Hammond’s third autumn budget ushered in a significant change to future R&D tax relief claims made by loss-making SMEs. From April 2020, the payable cash credit in any given year coming from such claims will be limited to three times the claiming company’s total PAYE and NIC liability for that year.
This new rule is likely to favour loss-making companies that hire in-house staff for their R&D projects rather than subcontract it out or use contract staff, as this will increase their annual NI and PAYE liability and they will therefore not be affected by this cap on the cash benefit.
This is an anti-abuse measure aimed at companies that have few if any UK operations, pay no UK tax, and then subcontract out their R&D (potentially back to a related overseas company) for a cash benefit. HMRC have been aware for some time that despite general anti-avoidance legislation, some overseas companies have been setting up this structure in the UK for exactly this purpose.
However, with this cap comes the potential unintended consequence of reducing the financial incentive to newly-formed, or project-based UK companies that are carrying out genuine R&D activities and who rely on the flexibility, expertise and cost-effectiveness of contract workers or subcontractors to tide them over for the first few years while they look to turn a profit.
The Government has said that there will be consultation on this measure and some of the key details that we intend to raise are:
- Differentiating between payments to UK-based contract workers, or subcontractors, who will themselves be subject to UK tax, as opposed to overseas subcontracting.
- Differentiating between companies that subcontract within a group to connected parties, and the extent to which those connected parties may be taxed by the UK, and those that subcontract to non-connected parties.
If you think this amendment to the R&D tax credit scheme may impact your future R&D claims, contact us for advice on how to best manage your R&D tax credit claims going forward.