October 30th, 2018

What Impact Does the 2018 Budget Have on R&D Tax Relief?

The more things stay the same…

The Chancellor announced during his Budget speech yesterday that all of the main rates attaching to the tax relief available on qualifying research and development have been frozen until the end of the 2020/21 tax year.

The R&D expenditure credit available to companies not qualifying under the SME regime is to continue at the 12% rate.

Qualifying R&D expenditure falling within the SME regime will continue to be enhanced by 130% meaning companies will be able to obtain tax relief on £23,000 for every £10,000 they spend on R&D.

Loss-making SMEs will also still be able to exchange losses attributable to R&D for a tax credit at a rate of 14.5%.

…The more they change

All this is relatively good news, but there’s a sting in the tail from April 2020.

The amount of repayable tax credit will be restricted to three times the company’s total PAYE and NICs liability for the year.  This is designed to tackle artificial arrangements in which tax credits are obtained when none would normally be due.

This measure is expected to raise £45m a year for the government and very much appears to be tackling a nut-sized problem with a legislative sledgehammer.  The government, however, has said it will open a consultation before the rule change comes into effect.

Although the government has said that it expects most R&D tax credit claims to be unaffected, there is clearly a demographic that will be significantly affected by this change.

An example

Let’s consider a limited company carrying out 100% qualifying R&D, with no income and the only cost being the salaries of the two directors amounting to £12,500 each.  This is by no means an uncommon scenario, in particular among start-ups.

This particular company would see its tax credit reduce by over £5,500 under these new rules.  This could be the difference between the business thriving and failing.

Un-joined up thinking

This all seems at odds with the government’s commitment, announced in the very same Budget, to provide increased investment in new innovation and technology.

It’s all the more baffling considering HMRC already has the power to deny fraudulent R&D tax credit claims, as evidenced in one case were up to £300m of fraudulent tax credit claims were thwarted.

If your company is going to be affected by this change then I would suggest responding to the consultation is a must.

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Filed under

Budget Funding HMRC R&D


John manages a wide portfolio of owner managed businesses and oversees the smooth operation of the firm’s payroll department.

After obtaining his degree in mathematics from the University of Liverpool, John joined Jonathan Ford & Co in 2004 and qualified as a chartered accountant four years later. John likes to keep abreast of developments in tax and accounting and is responsible for the mentoring of junior staff.

Outside of work, John enjoys powerlifting and is a Liverpool FC season ticket holder.

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