The new Conservative Government was expected to provide stimulus for UK businesses operating outside the EU post-Brexit and measures to support innovation were announced in Rishi Sunak’s first budget.
In summary, research and development expenditure (RDEC) rate has increased from 12% to 13% from 1 April 2020, public research and development (R&D) investment will be increased to £22bn per year by 2024-25 and the PAYE cap has been delayed for a year – great news for SMEs.
As originally proposed, the PAYE cap would have significant consequences for genuine, struggling start-ups and businesses. The plans would not be beneficial, as newer companies undertaking R&D with little staff costs would be unjustly punished. This would ultimately end up in loss-making companies surrendering R&D relief for cash capped at three times a company’s PAYE and National Insurance bill.
Innovative start-ups doing R&D in areas such as robotics, biotechnology and I.T. would have potentially been penalised unfairly along with businesses that utilise subcontractors (with no staff costs). This delay allows for an extended time to consult the rules, ensuring the cap targets tax avoidance and fraudulent claims, but also making sure that eligible businesses can access the relief.
HMRC has published a series of proposed amendments:
– increasing the cap to three times PAYE and National Insurance plus £20,000;
– introducing a minimum threshold of £20,000, so credit claims below this won’t be caught by the cap; and
-allowing attributable PAYE and National Insurance sums for employees of other companies within a group and other companies under common control to be used to calculate the cap, if those workers contributed to R&D.
HMRC also suggests bringing in an uncapped element for the companies that meet these requirements:
– no more than 10% of the qualifying costs would have to relate to connected party subcontractors or externally provided workers; and
– firms would have to actively manage their intellectual property arising from R&D.
The difficulty with the above is outlining how the intellectual property is actively managed. Apart from license agreements, supporting evidence involves anything from formulating plans to making decisions and covering key areas that are occasionally overlooked. This could be minutes of meetings and business plans, or other particularly time-intensive record keeping that requires expertise.
Many of these amendments are now subject to further consultation with a deadline for responses set for 28 May, and implementation for 2021. These relaxed rules should minimise the number of legitimate claims caught by the cap, but if companies do find themselves caught, they will still be able to claim and create losses (but will miss out on cash credits).
Corporation Tax remains at 19%
The planned reduction in the corporation tax rate to 17% has been reversed. It remains at 19%, with savings going towards supporting the NHS. There is no change to the SME R&D scheme, with tax reliefs still worth around 24.7% to 33.4% depending on a company’s profit or loss position.
Expenditure Credit – an increase from 12% to 13% in tax relief
The RDEC scheme has received an increase from 12% to 13% in corporation tax relief for expenditure incurred on or after 1 April 2020. This will be a significant cash improvement for many firms, helping to drive innovation in the economy. The RDEC scheme is used to generate a taxable credit for companies that don’t meet the SME criteria of fewer than 500 employees and less than either €100m turnover. Although RDEC relief is claimed by large companies, it can also be claimed by SMEs carrying out contract or subsidised R&D.
The impact of the rise in the RDEC rate is that from April, the net rate is 10.53% of eligible R&D costs (simply put, a cash credit of £10.53 for every £100 of qualifying R&D expenditure). The Government is also looking at the possibility of modernising the regime to include investments in data and cloud computing – positive news for those companies undertaking software development projects that do not yet qualify under the scheme.
An optimistic future
A sizable increase to the RDEC rate is fantastic news for releasing cashflow for many businesses and continues to provide an attractive incentive for investing in innovation. Notwithstanding the strain placed on the country’s finances by Covid-19, the outlook appears unlikely to change, with an increased Government investment in R&D to £22bn per year by 2024-25 – the most significant increase ever made in support for R&D.
Ultimately, the outlook for innovative companies is very promising in these uncertain times. UK Businesses can continue to welcome Government support for R&D tax incentives.