Research and Development (R&D) tax credits have been lucrative to businesses that invest in qualifying expenditure. However, the attractiveness of the Government’s R&D scheme has also been an easy target for tax evasion, and is therefore under constant scrutiny. In the Autumn Budget, the Chancellor announced that the Government would be introducing measures to close any loopholes – but it could have a wider impact.
R&D tax credits are an extremely generous tax relief. There are two schemes available:
- The Small or Medium sized Enterprise (SME) Scheme (organisations with fewer than 500 employees AND an annual turnover not exceeding €100 million) and;
- The Large Company Scheme – replaced by the Research and Development Expenditure Credit (RDEC) scheme in April 2016.
Under the SME scheme, for every £1 spent on R&D, the Government enhances the expenditure by 230% and deducts it from the business’ taxable profit.
What happened in the Budget?
In today’s Autumn Budget, the Chancellor announced that the amount of payable R&D tax credit that a qualifying loss-making company can claim, will be restricted. The amount they receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year.
This has been named as a measure to prevent the abuse of R&D tax relief for small and medium-sized enterprises (SMEs). This will ensure the relief is robust against identified abuse, including fraud, following the prevention by HMRC of fraudulent claims worth £300 million.
The Government will consult on this change, but at the moment, the changes will take effect from 1 April 2020.
What is the impact of the changes?
The changes are unlikely to put anyone off claiming for R&D tax credits, but it is extremely likely that it will restrict claims. Limiting claims could put people off investing in qualifying expenditure if they know they will not get the associated tax relief. This could have a knock on effect on the investment in our infrastructure, particularly in the technology sector.
It will be interesting to see how the Government’s changes to R&D tax credits will affect claims and we will be keeping a close eye on any news as it develops.