The UK witnessed a new dawn for politics late last year, at least for the next five years, as the Conservative Party secured its biggest Parliamentary majority since 1987. Prime Minister, Boris Johnson was the country’s favoured candidate to lead the nation in the initial years after Brexit, with Johnson hailing a “new dawn” and a wave of optimism for the British economy and business as a whole. Certainly, domestic policies will be more important than ever for the government as the UK forges a new path in a post-Brexit world. In the Conservatives’ general election manifesto, Mr Johnson made a firm commitment to ambitious businesses investing in innovation that they would receive tax credits on research and development (R&D) projects, underlining the government’s approach to backing business.
The manifesto explicitly commits to ushering in the “faster-ever increase in domestic public R&D spending, including in basic science research, by upping the research and development tax rate, or how much tax relief businesses are able to claim on research spending, by one per cent, going up to 13 per cent”.
Will the R&D SME tax credits ‘cap’ remain in place for April 2020?
It seems that the Conservatives’ approach to innovation and empowering businesses to blaze a trail for cutting-edge research has changed markedly from its 2018 Budget. During this speech, it was announced that a new cap on R&D SME tax relief would be introduced from April 2020, in a bid to combat fraudulent claims made by ‘artificial corporate structures’.
The theory is that a new R&D tax credit cap will deter corporations from being formed with the sole intention of claiming tax relief for faux R&D projects. That’s because the cap will limit the amount that loss-making companies can claim in R&D tax relief to three times the amount of a company’s Pay As You Earn (PAYE) and National Insurance Contributions (NICs) liabilities. Artificial companies that have taken advantage of the system in previous years have not employed many staff, nor do they pay PAYE or NICs.
Following the 2018 Budget, there were concerns among the business community that the cap would hold back legitimate start-ups and small firms from being eligible for R&D tax relief. While most business owners would support the view of preventing fraudulent claims from leaving the Treasury’s coffers, HM Revenue and Customs (HMRC) should also ensure that genuine R&D activity is accounted for. A large percentage of start-up companies are loss-making in the outset; nor do they have sizeable salary costs due to their reliance on freelancers or directors that take little to no money out of the business in its early stages.
It’s a case of ‘watch this space’ for the 2020 Budget
Consultations have been staged with HMRC, allowing businesses to voice their concerns. An eligible firm with nil NICs or PAYE liability will not receive relief under the new cap. Will that genuinely be the case in April 2020? The 2020 Budget takes place on 11th March, with Chancellor, Sajid Javid outlining the government’s first post-Brexit fiscal plans. We will have to watch this space as to whether or not the government can find an alternative way to curb the fraudsters, without penalising innovative smaller firms.