November update – Changes to R&D legislation
In the 2018 budget, the government announced that a cap set at 300% of a company’s PAYE/NIC liability would be applied to SME scheme payable credit claims.
The government then consulted extensively (in 2019 and again this year) and after considering all the views put forward, the government is now confirming that the design of the PAYE cap will include the following features to minimise the impact on genuine businesses:
· A company making a small claim for payable credit below £20,000 will not be affected by the cap.
· A company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap and these will be subject to the 300% multiplier.
· A company’s claim, of any size, will be uncapped if it meets two tests. These tests require that a company’s employees are creating, preparing to create or actively managing intellectual property (IP) and that its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure.
Draft legislation for this measure, and a summary of responses are available on GOV.UK
The government has also released two reports on the effectiveness and returns that it sees on its investment in R&D in the UK through the SME scheme and RDEC scheme.
These reports evaluate the impacts of the aforementioned R&D tax reliefs. Some of the key findings were:
· The evaluation of the SME scheme was shared with the European Commission in September 2019 as part of the government’s commitment to an independent evaluation for the State aid re-notification.
· The evaluation suggests the scheme generates direct, indirect, and spill-over effects benefiting businesses that claim relief and the economy as a whole.
· As such, it can be seen as satisfying its general and specific objectives.
· However, compared with earlier evaluations it does suggest the additionality ratio – the extra R&D expenditure for every additional £1 of relief – has fallen to between 0.60 and 1.28.
· The evaluation of the RDEC scheme was carried-out pro-actively by HMRC. It suggests a greater additionality ratio (around 2.5) than the SME scheme and that the relief could have generated up to £7.1bn of additional R&D expenditure in 2017-18.