Posted: November 23, 2020
Changes to the research and development tax relief system were originally proposed for 1 April 2020 – due to various matters these changes were delayed. HMRC have now published further details of the changes to apply from 1 April 2021.
The draft legislation for the changes is published as part of documents for the Finance Bill 2021.
The changes were introduced to restrict the payable R&D tax credit where a company incurs limited expenditure on salaried employees. After consultation the restriction has been softened to some extent but will have a significant impact on some companies – particularly where research and development is conducted through the use of external contractors.
The changes introduce a cap on the level of the payable R&D tax credit that is limited to the sum of the calculation below;
a. £20,000 , plus
b. 3 times the total PAYE and NI paid by the company for the year concerned.
There is an exemption from this new restriction – this will apply where the company is generating specified Intellectual Property such as Patents and limited expenditure made to connected parties is incurred. This exemption is intended to address concerns from the pharmaceutical development sector where activities may have been unintentionally caught by this new restriction.
As an example the position is summarised below – this illustrates the position some companies may be presented with following April 2021 with a significant restriction in the quantum of any R&D tax credit.
|Current position||Accounting periods beginning after 1 April 2021|
|Total Qualifying Expenditure||£400,000||£400,000|
|Total PAYE & NI||£20,000||£20,000|
|Expected R&D Tax credit||£133,400||£133,400|
|Capped R&D tax credit||n/a||£80,000|
The changes are applicable for accounting periods commencing on or after 1 April 2021. As such it is unlikely to be beneficial to shorten accounting periods to 31 March and for some companies potentially impacted by these changes it may be preferable to run accounting periods to 28 February 2021.
Please contact Partner Tom Saltmer if there are any queries regarding the impact of these changes: TS@burgesshodgson.co.uk