Keeping you informed about changes to the scheme

News and Updates

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PAYE cap draft legislation

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.

Click here to view Pronovotech’s thoughts on the new measures, which we published back in August 2020 during the second consultation period.

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.

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Pronovotech’s thoughts regarding the recent CIOT guidelines on choosing an advisor for R&D tax claims

The Chartered Institute of Taxation recently issued an updated version of its guidelines for choosing an advisor for R&D tax claims (click here to view).

Much of the guidance comprises general good business practice. However, in addition to an advisor’s industry, technology and tax expertise there are some specific points we think are worth expanding on:

  1. The guide stresses that marketing promises that ‘look too good to be true,’ or any claim to be using an ‘HMRC-approved methodology,’ should be viewed with extreme caution. It points out that HMRC does not approve tax advisors, nor tax claim methodologies.

The ‘too good to be true’ point is important; in the same way that it is tempting to go with the estate agent that is prepared to ask the highest price for your house, it is tempting to go with the R&D tax advisor that claims that it will ‘maximise the claim’.

The risks here range from, as with the estate agent, the disappointment of the benefit being lower than expected to the much more onerous situation of a dispute with HMRC. It is much better, especially from an accounting provision perspective, to work with the advisor to develop a realistic and sustainable estimate of the benefit up front.

  1. The guide also emphasises the value of contacting a few firms and arranging to meet in order to evaluate how you might be able to work with them.

Unfortunately, the R&D tax scheme is viewed by some as providing ‘free money’ in the same vein as something along the lines of personal injury claims. This is evident in the use of phrases like ‘no win, no fee’ or ‘100% success rate’ in the sector.

We have heard examples of some advisors taking advantage of the client’s expectation of receiving money that they otherwise would not by proposing fees that are wildly disproportionate to the amount of work involved in managing the claim process. While a fair fee for the work done is of course right and proper, it is in place to reward the companies doing the R&D in order to stimulate the UK economy, not to channel money to advisors.

  1. Another key consideration is the nature of the aftercare services provided by advisors in cases where HMRC’s initial review of the R&D tax credit claim results in follow-up enquiries.

This is critical. HMRC, while promoting the scheme to stimulate R&D in the UK, also has to manage taxpayers’ money carefully. As advisors, a proportion of our activity involves clients that have approached us because HMRC is querying their claim and their existing advisor is either unable or unwilling to help.

This generally involves unravelling and re-presenting the claim in a way that presents HMRC with a clearer view of the R&D activity undertaken, sometimes excluding any projects and costs claimed in error.

Our view has always been that it is much better to submit a strong claim first time.

  1. Finally, the guide recommends that customers seek clarity on whether the adviser is happy to be reappointed each year, or expects a multi-year service contract. In the latter case, what are the conditions for terminating the contract before it formally ends?

Why do clients get ‘locked into’ multi-year contracts? One rationale might be that the annual fee for the advisory service is either lower to reflect the multi-year relationship, or that the fee reduces each year as the advisor and the client grow increasingly familiar with the process and the type of work being claimed for.

However, our experience with clients that have come to us following the expiration of such relationships is that this is not the case – ever – with the same disproportionately high fee repeated year after year.

Also see point 2 above regarding fee levels.

There is no need for a client to be locked into a multi-year relationship, especially as the experience of its own staff involved in R&D tax claims will grow and the service provided by the advisor is likely to change year-on-year accordingly.

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HMRC Update: Furlough payments, including those which are met by the Government through the Coronavirus Job Retention Scheme

Research and Development Consultative Committee (RDCC) Update – Furlough payments, including those which are met by the Government through the Coronavirus Job Retention Scheme (CJRS)

An HRMC communication:

The purpose of this update is to let you know how HMRC expects companies to deal with staffing costs when calculating their Research and Development Relief (R&D) and/or Research and Development Expenditure Credit (RDEC) claims for periods in which they had furloughed staff.

The subsidy rules (s1138 CTA 2009) – this only applies to claims in the SME R&D scheme.

The CJRS is not a notified State aid, so when furlough payments are met by the Government through the CJRS the specific notified State aid rule at s1138(1)(a) is not in point.

However, to the extent that furlough payments are met by the Government through the CJRS, the general subsidy rules at 1138(1) do apply, meaning that the expenditure has to be treated as having been subsidised and will therefore not qualify in the SME scheme. The only area where this is likely not to be the case is if annual leave or sick leave is taken during furlough. As I cover later in this update such leave, unlike time spent solely on furlough, is included in the staffing cost calculation.

The staffing cost rules (s1123 and s1124 CTA 2009).

Looking first at the payments made to staff where all or a part of those payments have been met by the Government through the CJRS scheme. Details about the CJRS scheme can be found here –

Under the CJRS one of the key conditions for an employee to be furloughed is that they have been instructed by their employer to cease all work in relation to their employment. From 1 July 2020 it has been possible to be a flexibly furloughed employee, which allows businesses to bring back employees part-time, but requires the employee to do no work in relation to their employment during a CJRS claim period.

Furloughed staff are permitted to undertake study and training. As the furloughed employees have ceased all work during the CJRS claim period HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development during those times. This means that during those times the conditions in s1124(2) CTA 2009 are not been met in respect of their costs. HMRC therefore expect to see these costs excluded from R&D and RDEC claims. This applies equally to furlough payments met under the CJRS and to any ‘top-up’ from the company itself.

Turning now to furlough payments made to staff where none of those payments have been met by the Government through the CJRS scheme. As with payments within the CJRS scheme, where furloughed employees have ceased all work HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development. If some qualifying activity has been carried out then HMRC would expect companies to claim in the usual way and draw their attention to the appropriate proportion rules found in s1124(3) and (4) CTA 2009.

Absence from work for sickness or annual leave.

HMRC consider that paying holiday pay and sick pay is a necessary cost of the employees undertaking R&D work and is, in effect, part of the cost of their working time.

This means that HMRC allows claimants to apply the same apportionment between qualifying and non-qualifying activities to holidays and sickness as they do to working time. HMRC consider that any period during furlough which is taken as annual leave or is recorded as sick leave can be included in the staffing cost calculation. However, for the reasons outlined above, the staffing costs incurred on leave and sickness during furlough are subsidised to the extent that they are met under the CJRS. Whilst this will not affect companies which only claim RDEC it will prevent this element of the staffing cost from qualifying where a company is making a claim in the small and medium size enterprises scheme (chapter 2 of part 13 CTA 2009).

The company would however be able to include these staffing costs in a claim for RDEC (s104F to s104H CTA 2009). HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.

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Pronovotech responds to HM Treasury/HMRC consultation

HM Treasury and HMRC have jointly issued a consultation document on proposals to re-introduce from March 2021 a cap on the amount of R&D tax credit claimable by SMEs by reference to a company’s PAYE and NIC liabilities. This is in response to instances of abusive claims seen by HMRC where companies have claimed the credit despite having no real UK qualifying activity. Placing a cap on the cash claim linked to the level of payroll taxes payable to HMRC might act as comfort as an indicator of genuine R&D work in this country.

Unlike the previous cap, which was abolished in 2012 and limited to the claimant company’s PAYE and NICs payable for the claim period, the new one would be three times that amount, with a £20,000 de minimis threshold. This recognises that R&D projects today often involve a range of technologies so that specialist external involvement is required in specific areas, or that large R&D projects require collaboration to ‘flex’ resources. Additional provisions would enable the liabilities of related companies to count towards the cap in certain situations.

The proposals are likely to have an impact on the ability to claim a cash credit for companies with a small workforce and subcontracting out major elements of their R&D work.

Our response to the consultation can be viewed here. We argue that further concessions could be included in the design of the cap that would benefit genuine claimants yet keep within the overall aim of safeguarding the scheme from abuse.

Please get in touch if you would like to discuss how the proposals might impact your claim.

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Welcome to the new Pronovotech website

Pronovotech is pleased to announce the launch of its new website.

For more than 15 years we have specialised in the implementation of the government’s scheme of tax incentives for research and development work, helping technology companies to claim their entitlement to this important benefit.

Our approach combines the technical and tax expertise required for this very specialised aspect of the tax system; our services range from support for specific aspects of the claim process, working with your accounting or tax advisory firm, to management of the entire claim lifecycle, including liaison with the HMRC inspectors.

We hope you enjoy our new website and find the information it offers to be of value. Please contact us if you require any further information; we would be delighted to see if we can help you.