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Research and Development (R&D): New cap on tax credit that SMEs can claim

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Over the years,  the R&D schemes have grown and changed in many ways.  The scheme provides valuable support to loss-making companies with a tax credit worth up to 14.5% of the R&D element of their surrendered losses received as an immediate cash benefit.

However, subject to a high level of fraud and abuse, new measures are required to ensure that the relief ends up in the right hands.

New measures for SMEs

Following the increased generosity earlier in the year for the large company scheme, HMRC have now announced a new restriction on SME claims for the repayable tax credit.

The SME scheme has seen a PAYE cap come and go over the years, and accounting periods beginning on or after 1 April 2021, see the return of such a cap.

The new cap limits the amount that can be claimed to £20,000 plus three times the company’s relevant expenditure on workers, i.e. the company’s own PAYE and NIC liabilities for the period.

In an effort not to deter smaller companies (with low PAYE bills) from making claims for genuine R&D activities, the new cap will not apply where:

  • its employees are creating or preparing to create IP or managing IP, and
  • less than 15% of its R&D qualifying expenditure is spent with connected persons.

Legislation implementing the measure will be included in Finance Bill 2021.

Here to help

The above is a summary of the measures, please contact us should you need any further help and advice on the current or proposed R&D schemes.

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