|Under the UK R&D Tax Credit programme, R&D costs incurred for work done around the world can qualify for R&D tax relief. This is a very generous aspect of the programme but one that was subject to abuse.|
Companies outside the UK, with no real business purpose in the UK, were setting up UK companies and running foreign R&D costs through the company only to obtain the refundable/payable R&D tax credit. HMRC identified roughly £300M in fraudulent attempts.
To prevent this abuse, a draft legislation has been introduced whereby any payable R&D tax credit would be limited to 3 times the PAYE.
The problem with this cap is an unintended result to deny or substantially reduce the payable R&D tax credit for certain SMEs, particularly start-ups. In many cases, start-ups engage staff on a contract basis as opposed to employee/PAYE basis for various reasons.
Thus, you can have the situation where a start-up has one employee on a reduced salary (because the company is bootstrapping) and hiring R&D staff on a contract basis. For example, if the PAYE were £5,000, the payroll cap would be £15,000 and therefore any payable tax credit over this amount would be denied. With the average SME receiving roughly £55K in tax credits, this could result in a substantial reduction of R&D tax credit relief.
If you have any questions on the R&D tax credit programme, or how this particular legislation may affect you, please contact your usual Partner or Manager who will be happy to help.