R&D Tax Relief: HMRC Try to Tackle Abuse

Many companies, not just those in the tech industry, will have benefitted from the generosity of R&D tax relief. Eligible R&D expenditure can be inflated by a notional 230% uplift, and a refund of tax claimed on tax that was never paid in the first place. Perhaps not unsurprisingly, HMRC have identified abuses of these super-generous rules and a consultation paper has now been issued setting out how they intend to tackle this:

• Preventing abuse of the R&D tax relief for SME’s (28 March 2019)

As you will see, the main proposed changes are:

1. Introducing a cap on the amount of repayable tax credit that a qualifying loss-making business can receive through the relief in any one accounting period (the cap will be three times the company’s total PAYE and NICs liability for that year and will be implemented from April 2020). The government is aware that applying a cap on the amount of repayable tax credit a company could claim will add some administrative burden for businesses. It is therefore considering applying the cap only to repayable tax credit claims above a certain ‘threshold’, so that the smallest claims would be unaffected, keeping things as simple as possible.
2. Where potentially surrenderable losses cannot be surrendered for a repayable tax credit because of the cap, those losses, to the extent that they are carried forward, would still be potentially surrenderable. These ‘carried forward (potentially surrenderable) losses’ can be used as normal in later accounting periods, but companies would also have the option to surrender them in exchange for repayable tax credit for a limited period of time – e.g. for two years – if there is sufficient PAYE and NICs liability after any claim which relates to the current year.

The cost of the R&D Tax Relief scheme is estimated to be around £1.8bn a year. HMRC has identified (and prevented) fraudulent attempts to claim the SME scheme repayable tax credit totaling over £300m.  In these cases, companies were set up to claim the cash available through the repayable tax credit even though they had no R&D activity.

Responses to the consultation process are invited by 24 May 2019.

Disclaimer - All information in this post was correct at time of writing.