Take action now to help clients protect SME payable R&D tax credit

Chancellor Philip Hammond announced in last month’s Budget that the Government would be seeking to prevent abuse of SME payable R&D tax credits. This represents an opportunity for accountants to bring real value to their clients by advising them to take action now to protect their SME payable R&D tax credit.

The change in legislation will see the Government reintroduce the PAYE and NIC cap on the SME payable R&D tax credit that was previously abolished in 2012.  This time, from 1 April 2020, the limit will be set at 300% of the company’s total PAYE and NIC for the period.

Investment in innovation

For the vast majority of businesses, R&D tax credits are a valuable source of funding that helps them to grow and prosper.  The Chancellor has reintroduced the PAYE and NIC cap to drive the right behaviours amongst businesses and ensure the incentive achieves its aim. This is to increase private sector investment in innovation.  The move is also an attempt by the Government to ensure that this important relief reaches genuinely innovative businesses.

However, this move means that, unintentionally, early-stage innovative start-ups and companies that regularly use a contract workforce for projects could be penalised if they can’t afford to take on permanent staff.

Although the Government thinks that this change in legislation should only impact 5% of claimants, start-up and clients in sectors such as IT and construction in particular may feel an impact.

This is particularly worrying at a time when some of these industries, such as construction, are already feeling the impact of Brexit with project delays and cancellation, cost inflation and financing restrictions.

Getting prepared

Clients in sectors that regularly dial up and down different skillsets depending on their project will be heavily weighted towards third party costs rather than salaried staff. There is therefore an opportunity to help them think about how best to prepare for this change as a business.

Furthermore, while the legislation doesn’t start until the accounting period beginning on or after 1 April 2020, there is an opportunity to enhance relationships with clients, by acting now. Accountants and other advisers can add value by taking time to reflect with clients on how best to protect their payable R&D tax credit value. It may be possible to make some changes now to navigate this change in legislation and maximise the cash benefit of a R&D tax credit claim.

Another consideration is that many small business owners currently take their remuneration as a dividend due to it being more tax efficient than a salary. After this change, these entrepreneurs may instead find taking a salary more attractive if it protects their business’ payable R&D tax credit.

By discussing these issues now, clients will be able to continue to go from strength-to-strength as they benefit from this valuable source of funding to grow their business.

Expert advice

As this is a significant change, it is important to seek the advice of an expert, such as ForrestBrown, named earlier this year as ‘best independent consultancy firm’ by Taxation Awards 2018. ForrestBrown’s 80+ strong team of chartered tax advisers, lawyers, sector specialists and former HMRC inspectors use their process to deliver maximised R&D tax credit claims that are protected from risk.

They will be consulting on this issue with the Government and are committed to working in partnership with accountants to provide strategic R&D tax credit advice and bring additional value to their client relationships.