Research & Development Relief (R&D) refers to the activity a company undertakes to develop new products, processes, or services or improve those that already exist. In 2000, the government introduced the scheme, which allows businesses to claim back up to 33 pence per every £1 spent on implementing new innovative activities within their business.
The R&D incentives are for both small and medium-sized enterprises (SMEs) and large businesses that have implemented innovative advancements within their company.
There are different R&D reliefs available depending on your company size. For SMEs, companies can deduct an extra 130% of their qualifying costs from their yearly profits and for larger companies, you must claim through the Research and Development Expenditure Credit Scheme (RDEC).
What changes are being made to the R&D tax relief?
As we approach the new tax year, there are a lot of changes coming into force and more tax changes will be implemented from April 2023 that will have significant impacts on R&D tax credit claims for some companies.
For all accounting periods beginning in April 2021, the amount of tax credit for SMEs will be restricted to £20,000, plus 300% of the companies’ PAYE/NIC liabilities. In some cases, the PAYE & NIC liabilities of connected companies can be taken into account.
Why is the cap being introduced?
HMRC believes that over the years, a number of people have been making erroneous claims for the R&D relief when their business does not qualify for the R&D tax credit. With the cap being implemented, HMRC hopes that the new legislation will be better structured to prevent the relief from being exploited.
Despite the PAYE cap being implemented, there is an exception to this rule if companies satisfy both of the following conditions below:
Condition A:
A company meets condition A for an accounting period if, during the period, the company is engaged in—
(a) taking, or preparing to take, steps so that relevant intellectual property will be created by it,
(b) creating relevant intellectual property, or
(c) performing a significant amount of management in relation to intellectual property
For the purposes of this section, a company is only engaged in an activity mentioned in paragraph (a), (b) or (c) if the activity is wholly or mainly undertaken by employees of the company.
For companies to be exempt from the new PAYE cap, they also need to meet the requirements of condition B.
Condition B:
Expenditure on the work is subcontracted to, or any external workers assisting on the project by a connected party, is less than 15% of its overall R&D expenditure.
With these changes in the R&D relief, very small companies will be most likely to be affected, as it’s more common for smaller loss-making businesses to use subcontractors.
How can Edwards Accountants help?
If you want to know more about how the changes in this scheme will affect you, why not speak to trusted tax accountants?
As experienced chartered auditors in Walsall, we would be delighted to advise on how much you can claim despite the PAYE cap and since we offer a range of tax services, we can discuss alternative tax reliefs too. Please contact us to speak to our trusted team of tax advisors in Walsall or our Loughborough team, and we’d be happy to help by offering you tax advice.
For our West Midlands Offices:
Tel: 01922 743 100
Email: aldridge@edwardsaccountants.co.uk
For our East Midlands Offices:
Tel: 01509 357 707
Email: loughborough@edwardsaccountants.co.uk
