HMRC is currently consulting on the research and development (R&D) tax regime for small and medium sized enterprises (SMEs) in response to perceived abuse of the regime by certain persons operating artificial structures involving UK companies with minimal economic substance. In particular, HMRC is looking to introduce a cap to the repayable R&D credit that is available in certain circumstances, based on three times the company’s income tax and National Insurance contributions liability for the period under PAYE with effect from 2020.
Without doubt the R&D regime should be fair, and it is critical for the Government to take steps to avoid abuse to ensure relief is targeted at those that need it most. However, it should be noted that the proposed introduction of any form of cap is likely to lead to some companies losing out for a number of reasons. On the positive side, HMRC appears to acknowledge this, and a key focus of the consultation is therefore around avoiding unintended consequences.
For example, the proposals could impact start-up companies where directors decide to take no remuneration or to defer remuneration. Such decisions are often taken by the directors with a view to maximising funds for the company to establish itself and grow. As it stands currently, there is no PAYE cap for SMEs, so they can claim R&D tax credits provided the relevant criteria are met. Going forward, it may be that there is no scope to do so where no salaries are paid and therefore no PAYE liability arises.
This could also prove problematic, for example, where companies cannot find employees to hire in the UK with either the required skill set or at cost-effective pay rates, leading to the hire of contractors, agency staff and the like. There would be no PAYE liability for such costs, which could then impact any claim where they represent the majority of company spend. In an increasingly global market, and with continuing uncertainty over the impact of Brexit, the loss of R&D tax credits could impact the viability of R&D projects for a number of UK businesses.
It is understood that HMRC estimates the new provisions would only impact around 5 per cent of R&D claims. This is nevertheless still a sizeable number of companies, and within this would be a number that would appear to be penalised for trying to run their business along commercial lines.
There is a suggestion by the Government that there may be a way of companies carrying forward the potential benefit of an R&D cash credit until a later period, where there is sufficient PAYE to enable a payment to be made. However, this carry forward is currently proposed for a short window of only two years, which could mean companies that defer salaries for a number of years could still lose out. At the very least, it would be welcome if the ability to carry credits forward for later payment is not time limited, giving companies peace of mind that there may be a benefit in the future.
With SMEs being the life blood of the UK economy, we feel the Government should continue to do all it can to support innovative business and we are contributing to the consultation to help shape any future changes.