Small companies to be subject to cap on R&D Tax Credit Repayments

Companies in receipt of repayable Research and Development (“R&D”) tax credits under the small companies (SME) scheme might be impacted by a new cap on the amount of repayment receivable, coming into effect for accounting periods beginning on or after 1 April 2021.

This provision had been scheduled to come into effect on 1 April 2020, but due to the uncertainty caused by the Covid pandemic, was shelved for a year.

The detail has now been unveiled in next year’s finance bill.

Companies will be limited to receiving £20,000, plus 300% of its PAYE and NIC liabilities (and potentially 300% of the PAYE and NIC liabilities of connected companies).

The inclusion of a £20,000 threshold protects those with small claims, which will be a welcome relief for a lot of businesses.

Whilst this will come as a blow for some claimants, it targets those who subcontract large amounts of their R&D to third parties so a lot of companies should be unaffected by the cap.

There is also an exemption to the cap, for companies who meet two conditions:

  • Condition A requires the company to be creating, preparing to create or managing intellectual property. These activities must be undertaken largely by employees of the company, and the company must have the right to exploit the intellectual property.
    • This is a similar requirement to the patent box regime, but this test is focussed on the management activities around the exploitation and development of IP rather than ownership. This means formulating plans and making decisions in relation to the development or exploitation of the rights, to include activities such as:
      • Being involved in planning or decision-making activities associated with developing and exploiting the IP;
      • Deciding whether to grant licences, expand research activities or product analysis, and development from their IP;
      • Deciding on maintaining and extending protection in other jurisdictions.
  • Condition B requires that the total of the company’s qualifying expenditure with connected persons (on externally provided workers and subcontracting R&D) is no more than 15% of its qualifying expenditure

These provisions are designed to exempt companies with low PAYE and NIC, but which are nevertheless themselves engaged in genuine, substantial R&D.

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