For SMEs, R&D tax relief has become much more generous in the last few years, with the total tax relief increasing to 230% from April 1st, 2015. For companies not paying corporation tax there is the opportunity to claim cash back from HMRC, overall creating vital source of finance for technology SMEs.
The PAYE/NIC cap restrictions previously applying to this valuable cash source were removed from April 1st, 2012, making this relief even more beneficial giving a potential benefit for loss making companies to be up to 33.35p for every £1 of eligible R&D spend.
In the past, the removal of the original PAYE/NIC cap was welcomed as it restricted the repayment available to the total of the amount of PAYE and NIC paid by the company. The cap disadvantaged SMEs that had few staff, instead relying on the input of the owner/directors or the use of subcontractor input to the development process.
As a leading small business accountant, our team are experts in tax advice and planning for SMEs. R&D tax relief, along with many other ways to reduce a company’s tax bill, can often be overlooked by small business owners. That’s where Accounts and Legal can help.
In his 2018 Budget on October 29th, 2018 the Chancellor announced a forthcoming restriction to limit the amount of payable tax credit that can be claimed by a company under the R&D SME tax relief.
The announcement states that the limit will be set at three times the company’s total PAYE and National Insurance contribution (NICs) payment for the period.
The change will have effect for accounting periods beginning on or after April 1st, 2020. Any loss that a company cannot surrender for a payable credit can be carried forward and used against future profits.
The Government have said that they will consult on this change.
The announced change has been introduced in order to prevent abuse of the R&D tax relief for SMEs by the use of artificial corporate structures using companies to claim the payable credit, even though they have no legitimate R&D activity.
Another stated concern is the use of structures set up to claim the payable tax credit despite having little or no employment or activity in the UK. An HM Treasury Policy paper released on Budget day states that HMRC has identified and prevented £300m of fraud and that this change will help to address similar abuses in the future.
Reduction and elimination of such abuses of the regime and ensuring a real UK presence is to be commended.
However, the mechanics of this solution are a retrograde step that may potentially disadvantage precisely those genuine companies who, for reasons of cost control and resource constraints, are unable to employ a large number of staff in the company carrying out the development process.
This will tend to affect start up companies with a small staff rather than the larger, more established companies, that may have a larger staff incorporating the R&D staff as well.
Typically such start ups will tend to use subcontractors or externally provided workers on whom they will not have to account for PAYE or National Insurance. Companies whose claim contains a large amount of consumables in the R&D process may also be adversely affected if the costs of these are high in proportion to employee costs.
Whilst the announcement indicates that the PAYE and NIC cap will be at three times the company’s total contributions, which is more generous than the previous incarnation of the cap, this will have the potential to reduce the amount of R&D that genuine SMEs will be funded for under the SME scheme.
HMRC have said that close to 95% of companies currently claiming the payable credit will be unaffected, however this will introduce a measure of uncertainty to SMEs when planning how R&D projects will be resourced.
The ability to carry forward the additional losses generated by the relief to offset against future profits will not assist with vital cashflow at the development stage.
Given his limited options at this point in time, the idea of a Treasury reserve to boost the economy in the case of a hard Brexit seems sensible – although whether this calmed any nerves is perhaps debatable.
One suspects that many businesses will have already started building their own Brexit reserves and may continue to add to them for a little while yet.
In summary, here are the major points for small businesses to be aware of in the wake of the 2018 Autumn Budget:
Personal tax allowance will be raised to £12,500 for basic rate tax payers, and £50,000 for higher rate tax payers in 2019
£675 million will be put towards a Future High Streets Fund
Business rates bills for businesses with a rateable value of £51,000 or less will be cut by a third over two years
While this is some of the biggest news that will impact small businesses in the UK, the Chancellor announced a number of other measures owners may want to keep their eye on.
Annual investment allowance will be increased from £200,000 to £1 million for two years
Small businesses will now only have to contribute five per cent to the apprenticeship levy
New mandatory business rates relief for all toilets made available to the public, whether publicly or privately owned
A £30 billion package for England’s roads, including repairs to bridges and potholes
Fuel duty will be frozen for the ninth year in a row, saving car drivers around £1,000 and van drivers around £2,500
Beer, cider and spirits duties will be frozen, though wine duty will rise with inflation and tobacco duty will continue to rise by inflation plus two per cent
The VAT threshold won’t change for now
The national living wage will increase to £8.21
Unsure how the budget affects your small business, or how you can make the most of fresh changes to further your company? Get in touch to discuss how our accountants and business coach can take your business to the next level.