Recent investigations by HMRC have identified (and prevented) fraudulent attempts to claim the SME scheme payable tax credit totalling over £300 million.
In order to combat ongoing abuse of the SME R&D tax credit scheme, HMRC has therefore formally announced draft legislation with a view to ensuring that the relief is only directed to legitimate claimants.
Currently, the scheme enables companies to claim a tax credit worth up to 33.35% of qualifying R&D expenditure and receive an immediate cash-flow benefit.
From April 2021, however, new measures will cap the amount of annual SME payable R&D tax credit at three times the company’s total PAYE and NICs liability plus £20,000.
Smaller claims of up to £20,000 will be unaffected by the new legislation, as will larger claims meeting two key criteria:
- that a company’s employees are creating, preparing to create or actively managing intellectual property (IP)
- that a company’s expenditure on work subcontracted to, or externally provided workers (EPWs) provided by, a related party is lower than 15% of its overall R&D expenditure.
We had argued that further concessions could be included in the design of the cap that would benefit genuine claimants whilst still safeguarding the scheme from abuse.