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Businesses should act now to prevent the abuse of SME payable R&D tax credit

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We welcome the Chancellor’s move to prevent the abuse of the SME payable R&D tax credit.

We have seen first-hand the fantastic benefits that claiming R&D tax credits can deliver and so it is important this relief reaches genuinely innovative UK businesses.

To achieve this, the Government will reintroduce the PAYE and NIC cap on the SME payable credit that was 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.

“For the vast majority of businesses, R&D tax credits are a valuable source of funding that helps them to grow and prosper.”

However, the Chancellor has done this to drive the right behaviours amongst businesses and help the incentive achieve its aims: to increase private sector investment in innovation.

If SMEs invest in hiring their own staff, and creating STEM jobs, the cap will not impact the cash they can receive.

“It is interesting that this Government is reintroducing a measure that it previously abolished. Unintentionally, early-stage innovative start-ups could be penalised if they can’t yet afford to take on permanent staff.”

Whilst the legislation doesn’t start until the accounting period beginning on or after 1 April 2020, we would urge companies to take time to reflect on how best to protect their payable R&D tax credit.

It may be possible to make some changes now to navigate this change in legislation to maximise the cash benefit of your R&D tax credit claim.

“For example, 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.”

Furthermore, whilst the Government thinks that this change should only impact 5% of claimants, we know that some sectors such as IT, construction and start-ups will feel the knock-on impact.

Companies that regularly use a contract workforce for projects where they can dial up and down different skillsets depending on the project will be heavily weighted towards third party costs rather than salaried staff.

They, therefore, need to think about how best to prepare for this change as a business.

Given that the legislation won’t kick in until after 1 April 2020, there is time to plan for this change, but it may require action now.

Jenny Tragner is the director at R&D tax credit consultancy ForrestBrown 

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