Measure
The government has announced two new measures that are relevant to the operation of the research and development (R&D) tax relief regimes (the Small and Medium Sized Enterprise (SME) R&D tax relief scheme and the R&D Expenditure Credit (RDEC) scheme).
First, a consultation has been launched today to review all aspects of the two regimes, with the stated objectives of ensuring that the UK remains a competitive location for cutting edge research, that the reliefs are fit for purpose, and that taxpayer money is effectively targeted. The next steps from the recent consultation on the scope of qualifying expenditures for R&D tax credits will be considered alongside this wider review.
Second, the announced corporation tax rate increase to 25% will impact the net tax benefit of the relief under both regimes from 1 April 2023 for companies subjected to the higher tax rates.
In addition to the above measures, the Budget announcements confirm that the introduction of the PAYE-related cap on the payable tax credit for SMEs will go ahead this year.
The consultation will review all elements of the two regimes, including the nature of private sector R&D investment in the UK, how this is supported or otherwise by the R&D relief schemes and where changes may be appropriate. Consideration will also be given to bringing in data and cloud computing costs into the scope of the schemes following the previous consultation.
For companies paying at the main rate of corporation tax of 25% that is intended to take effect from 1 April 2023, and based on the current rates of R&D relief, the net benefit of the SME scheme will increase from 24.7% to 32.5% while under the RDEC scheme it will decrease from 10.53% to 9.75%. The net benefit percentage will vary for those companies with profits within the proposed tapering thresholds.
The introduction of the PAYE cap on the payable tax credit is intended to reduce abuse of the R&D tax credits scheme for SMEs. It was previously noted that this cap could have had an adverse impact on companies that use significant third party staff and/or subcontracted resources to support their R&D activities. Following the final round of consultation into the measure, the cap was set at £20,000 plus three times the amount paid in respect of PAYE and Class 1 NIC liabilities. Therefore, it will not bite for companies whose payable credit is not more than £20,000. Also, there is an exemption from the cap where a two-part test is met. In summary the test is met where the claimant company’s employees are creating, preparing to create or actively managing intellectual property, and the spend on connected party resources does not exceed 15% of the company’s qualifying R&D expenditure for an accounting period.
The consultation on R&D reliefs will run from 3 March 2021 until 2 June 2021
The main rate of corporation tax will increase from 19% to 25% from 1 April 2023.
The introduction of the PAYE cap on the payable tax credit under the SME R&D scheme will come into effect for accounting periods beginning on or after 1 April 2021.
The government has reaffirmed its intention to ensure the UK remains a competitive location for R&D to be undertaken and continues to attract highly skilled labour.
The government has listened to the views of R&D relief claimants in looking to extend and modernise the reliefs to include data and cloud computing costs as qualifying expenditure, as well as ensuring that tax relief remains effectively targeted. It is hoped that the new consultation will lead to constructive changes to the rules in a reasonable timeframe.
The amendments contained in the legislation relating to the SME PAYE cap following the final round of consultation will help to ensure it does not adversely affect legitimate claims, but will add further complexity to R&D claims under the SME regime.