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Are you prepared for the new changes to R&D tax relief in 2021?

From April 2021 the rules for R&D tax credit claims for SMEs are changing. As a result, those businesses that have benefited from this relief in the past, or are looking to, may be affected.

This process began a while ago.  The intention was published in the 2018 budget: a cap that would be introduced to limit the total R&D tax credit that could be received.  The cap would be a three times multiple of the company’s total PAYE and NICs liability.

The government consulted on the measure in the spring of 2019 and published a summary of the responses in the spring budget 2020, where they announced the changes and said that the implementation of the cap would be delayed until April 2021. The further consultation was published on 19th March 2020 and closed on 28th August 2020.

The nub of this is that there have been numerous fraudulent claims.  The government’s second consultation summarised the issue in a slightly ambiguous way: they claimed there had been £300m of fraudulent claims to March 2020. Given just one claim in 2016 totalled £300m, it seems likely the true total amount is considerably larger.

It was originally reported that the rules were due to affect accounting periods beginning on or after 1 April 2021, however, this has now been updated. If a company has an accounting period beginning before and ending on or after this date, they will be treated as two separate periods. The new caps will apply to the period from 1 April 2021.

What are the new changes?

The new cap will limit the total payable R&D tax credit to £20,000 plus three times the total PAYE and Nic liability of the company for the year.

Companies that claim below the £20,000 cap will be unaffected. This is to ensure that small businesses who deserve to get the benefits will be protected, whilst also making it more difficult for larger fraudulent claims to be made.

It is possible for a company’s claim to be exempt from the new measure, if it meets these two tests:

  • The company’s employees must be genuinely creating, managing, or preparing to create intellectual property (IP).
  • The expenditure for subcontractors must be less than 15% of R&D total expenditure, and the subcontractors must only be in use for the R&D activity.

Whilst we have found that many businesses may be unaffected by these changes, those companies that do rely heavily on subcontractor work for their R&D projects may find they are limited.

It is important to be aware of whether these changes affect you, and how the earlier date of 1st April 2021 for accounting periods will change your tax and financial situation.

Seeking professional advice may make these changes easier and more understandable. Fusion Accountancy are R&D tax credit experts, and we assist our clients with claims and advice throughout the year.

Contact us here to book a free discussion to find out more about how these tax relief changes may affect you.

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