HMRC has published 'Preventing abuse of the R&D tax relief for SMEs' a new consultation. It considers how the new cap on R & D relief may apply to loss making SMEs.

  • Budget 2018 announced that the amount of payable R & D tax credit that a qualifying loss-making SME business can receive through the relief in any one accounting period will be capped.
  • HMRC has identified fraudulent claims involving companies that were set up to claim payable tax credit even though they undertook no R&D and structures where expenditure outside the UK has been re-routed through a UK entity in order to claim payable tax credit.
  • The proposed cap will be three times the company’s total PAYE and NICs liability for that year and will be implemented from April 2020.

This consultation considers how the cap will be applied before it is legislated in Finance Bill 2019-20.

Responses and input are requested from businesses and their representatives currently using or planning to use the payable tax credit. Deadline for responses is 24 May 2019.

Consultation questions

Question 1 If the cap is only applied for payable tax credit claims above a defined “threshold“, at what level would this be useful at reducing any potential administrative burdens on genuine companies?

Question 2 If a group was only able to submit one payable tax credit claim at or below a certain threshold per year, how would this fit with the way that claims are currently made? How common is it for more than one company in a group or common control entity to make a claim for the payable R&D tax credit?

Question 3 If an element of the PAYE and NICs liabilities of another group or connected company were included as a part of the cap (where R&D has been subcontracted to it or EPWs provided by it), to what extent would this benefit companies? How much additional complexity would this add to claiming the payable tax credit?

Question 4 Would it be practical for claimant companies to obtain the PAYE and NICs information from other group or connected companies? Are there any limitations to their doing so? Would the other company be willing to provide this information?

Question 5 How beneficial would surrendering carried forward losses, to claim a future payable tax credit when sufficient PAYE and NICs liability has been generated, be to a company affected by the cap? Would a time limit of 2 years be appropriate? How straightforward would it be to keep track of the origin year of the losses?

Question 6 Would carrying forward losses make companies consider taking on more staff in the future - to unlock some (or all) of the rest of their payable tax credit?

Question 7 The government is interested in the characteristics of companies that could be affected by the cap. For example, if you are or represent a company likely to be affected by the cap, how large is the company in terms of employees? How many staff are primarily engaged in R&D activity? How old is the company? What sector does it operate in?

Question 8 What else could the government consider, regarding how the cap is applied to preventing abuse, to ensure genuine companies can continue access the payable tax credit? Are there any alternative measures that could prevent abuse of the payable tax credit.

Useful guides on R & D

R & D Tax Reliefs: At a glance
What's Research and Development (R & D) relief? How to claim R & D relief? Small company R & D relief explained? Can individuals claim R & D relief?

R & D: SME Tax Credit Scheme subscriber guide
What Research & Development (R & D) schemes can be claimed by R & D? How to make an R & D claim?

R & D Zone
Worked examples and case studies covering SME and large company R & D claims.

External links

Consultation: Preventing abuse of the R&D tax relief for SMEs