With the headline promise that austerity was coming to an end and Brexit negotiations precariously balanced on a knife edge, Philip Hammond’s October 2018 budget was always set to be one of the key political highlights last year.
It was announced that to help prevent abuse of the research and development SME tax relief by artificial corporate structures, the amount that a loss-making company can receive in R&D tax credits will be capped at three times its total Pay As You Earn (PAYE) and National Insurance contributions (NICs) liability. It is reported that HMRC identified and prevented £300 million worth of fraud linked to this relief, and this change is set to address similar abuses.
While this change is not set to be implemented until April 2020, this is a significant modification to the scheme, given that previous cap was abolished 7 years ago in 2012. Presently, the maximum amount that can be surrendered in exchange for a cash tax credit is 230% of qualifying expenditure, or the revised trading loss for the period, if lower. This can lead to highly valuable cash injections of several thousand pounds, thus rewarding companies for their pioneering work and helping them to continue.
While it is right that fraudulent claims should be prevented, and exploitation of the scheme is combatted, this cap will unavoidably have a detrimental impact on the claims made by some companies that for genuine reasons, have comparatively small PAYE/NIC liabilities. This does raise the question as to whether this change to the scheme is the most appropriate way to take action?
In today’s ‘gig economy’, it is incredibly for common, particularly for smaller start-up companies, to rely heavily on agency workers and subcontractors, rather than employing their own innovators under the PAYE scheme. Is it fair that such companies should miss out on this valuable relief despite producing the same output?
It’s in the nature of research and development for projects not to succeed first time round. As such, this can lead to higher trading losses being generated in a company’s infancy that previously would have been the vital financial key to allowing innovation to continue. While the change to the scheme does not prevent losses being carried forward to future years, and set against future taxable profits, the cash flow advantage offered by the scheme has become far less attractive for some.
MPA Group champions and advocates for innovation in today’s economy, and firmly believes that companies deserve to be rewarded as a result, so it is a shame that the R&D scheme has been restricted rather than boosted and promoted further. Investing heavily in research & development is not only logical, but more important than ever if the UK is to remain a prime hub for technology and innovation beyond Brexit.
Every day we help numerous companies unlock valuable reliefs available to them; get in touch today to discuss your individual circumstances.
Connor Whelan, Tax Advisor at MPA Group