HMRC have been busy putting a variety of measures in place to prevent the abuse of R&D tax credits. HMRC has already identified (and prevented) fraudulent attempts totalling over £300 million, a figure which shows the importance of implenting a deterance mechanism.
Proposed PAYE cap for SMEs
One of the measures planned for introduction in April 2021 will affect companies who recieve a payable R&D tax credit. HMRC have identified this category as a target for fraudsters, since the claimant company does not need to be tax paying and is able to access a significant cash payment from HMRC.
This measure has been public knowledge for some time, however the details have been limited and those that have been released were reported and not confirmed. A recent paper released by HMRC has shed extra light on how this measure will be implemented.
It has been announced that this measure will limit the amount of payable R&D tax credit an SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.
A company is exempt from the cap if:
- its employees are creating, preparing to create or managing Intellectual Property (IP) and
- it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons
The lure of vast sums of cash has encouraged unscrupulous companies to take advantage of the relief by viewing it as an opportunity to defraud the system. These policy changes are in place to prevent companies falsely claiming that they are undertaking R&D activities.
Clarity on the changes is very much welcomed as it has been a drawn out process with numerous consultations. This new measure will have effect for accounting periods beginning on or after 1 April 2021 so companies will have some time to digest the new rules.
The confirmed exemptions will aid in protecting those companies wishing to submit legitimate R&D tax credit claims, especially start up ventures who may be submitting smaller claims in their first years.
If you feel that your company could be affected by the PAYE cap or you want reassurance that future claims will be exempt from the changes, give us a call and our advisers will be happy to help.
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