Changes to SME R&D tax relief ahead

Research and development (R&D) tax credits provide an enhanced corporation tax deduction for companies that incur qualifying expenditure. The rates of R&D relief have generally have been increased over the years and can be claimed by even more companies since the £10,000 minimum spend was abolished on 1st April 2012.

Claiming Relief

Since 1st April 2015 for every £1 of qualifying R&D expenditure, an additional £1.30 is allowed in the SME’s corporation tax computation as a “super deduction”. This means that the total tax relief equates to 230% of the actual R&D spend.

The R&D tax credit that companies can claim is currently unrestricted.

The current proposal, as announced at the 2018 budget, is that for accounting periods starting on or after 1st April 2020 the R&D tax credit will be capped at three times the loss-making company’s PAYE/NI bill for the accounting period. The proposal is that any excess losses must be carried forward and offset against future profits which may take considerable time.

HMRC says the cap is required to reduce instances R&D claims and situations in which there are repayments being made to companies where minimal R&D activities take place in the UK in reality.

Example

A company has qualifying R&D expenditure of £8,000. As a result, it will be entitled to claim a tax deduction of £18,400 (£8,000 x 2.30). Assuming corporation tax on profits is paid at 19%, this will result in a tax saving of £3,496 – 43.7% of the R&D spend.

The SME in this example should be able to claim a cash payment, known as an R&D tax credit, instead. There’s currently no limit to the amount that can be claimed and since 1st April 2014 the rate of tax credit is 14.5% of the surrendaible loss.

Example

A loss making company that has spent £8,000 on R&D could claim a tax credit of up to £2,668 (£8,000 x 2.30 x 14.5%), equivalent to 33.35% of the R&D spend.