R&D restrictions for loss-making companies from April 2020

    In the Budget last month, just one major change was announced in respect of the R&D tax relief scheme, that being a cap on the level of R&D tax credit payable to SMEs wishing to surrender losses for cash. A similar cap had historically been imposed on companies until it was abolished in April 2012; the cap was set as the equivalent of the PAYE and NI contributions made by the company in the period. The intention of this was to encourage companies to employ technical staff (who in turn would pay income tax and national insurance contributions) in return for this to potentially be reimbursed as a credit if the company made a loss (very common when companies commence trading).

    The issue found with the abolition of this cap was that it was then seen to be less risky for start-ups to use third party subcontractors in the early years of trading which has had an adverse effect on employment opportunities in smaller companies. HMRC are, therefore, consulting on the cap being reintroduced from 1 April 2020, albeit this time the cap is set at three times the level of total PAYE and NI contributions made by the company. As a guide a technical employee paid £25,000 who spends 75% of their time on R&D will pay just enough tax to clear the cap, based on current tax rates and allowances.

    Companies whose R&D is currently geared more towards external subcontractors than internal staff should look at reviewing their set up by April 2020 to ensure that they do not fall foul of the proposed new rules.

    For more information please call 0345 223 2727 or email Mark Wood, R&D tax and Patent Box manager.