Zahra Shah and the team at Kapitalise explain the role of R&D tax credits and the changes that are taking place.
The R&D tax relief scheme is an initiative set-up by HMRC to incentivise UK based businesses to invest in research and development. The scheme supports the Industrial Strategy target of the UK of spending 2.4% of GDP on R&D by 2027. Innovative businesses can claim up to 33% of their R&D costs back in either cash (if loss-making) or in corporation tax savings. This can be a lifeline for SMEs who are strapped for cash or are looking to improve their cash-flow. The HMRC statistics show that, for the financial year ending in March 2020, 76,225 SMEs submitted a claim for R&D tax relief.
For a business to qualify for the scheme, a project must seek to ‘achieve an advance in science or technology and whereby projects and activities help to resolve scientific or technological uncertainties.’ For example, if a business has created new software to enable patients to book rapid medical appointments or developed new surgical tools, they are likely to have encountered technological uncertainties during their product’s development. Any project that advances the overall technological capabilities in an industry or sector may qualify for the R&D tax relief scheme.
As of 1st April 2021, the government has implemented a cap on the amount of R&D tax credits (the cash portion of a claim) a business is able to claim under the SME scheme. This cap is based on the businesses’ PAYE tax and national insurance contributions and has been designed to prevent overuse of the R&D scheme by businesses without a significant UK base. This cap can have a profound impact on businesses who are claiming R&D tax relief under the SME scheme if most of their labour costs are not run through PAYE payroll.
Here is what medtech businesses need to know if they are submitting an R&D claim.
- Any claim for payable tax credits will be capped at the threshold (£20,000) plus 300% of the business's total PAYE and National Insurance Contributions (NIC) liabilities under the SME R&D scheme.
- The cap if effective for tax years that start after 1st April 2021. For instance, a business whose financial year ends in December will not be affected by the cap until their 2022 financial year.
- The PAYE and NIC contributions used in the calculation are the total for the whole business, not just for R&D related activities.
- A business may be exempt from the cap if:
- Its employees are creating, preparing to create or managing Intellectual Property (IP) and
- Does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by connected persons.
With the release of the Autumn Budget 2021, the government have confirmed that they will expand the qualifying expenditure to include data and cloud computing costs.
The government have further stressed that they will continue to encourage UK innovation through the R&D tax relief schemes. With medtech businesses being at the forefront of innovation it is paramount to know how to get the most out of the R&D tax relief scheme; and what these changes will mean for your business.
