Preventing the abuse of R&D tax credits

Anthony Lalsing - Menzies Accountant

Menzies response to the consultation

Anthony Lalsing – R&D Tax Specialist

The link between R&D and economic growth is widely recognised and the government remain committed to stimulating innovation through established R&D tax reliefs. While the proposed changes are an important measure in combatting fraudulent R&D claims which threaten the integrity of the wider SME R&D scheme, it is important that such measures are not prohibitive to businesses who carry out genuine R&D and benefit from such tax reliefs.

HM Revenue & Customs’ (HMRC) ongoing consultation asks Professional Advisors and Industry experts how the popular R&D Tax Credits could be better protected against abuse of the scheme, while ensuring access remains open for those entitled to the relief. We welcomed this opportunity to contribute towards HMRC’ findings and the chance to apply our Brighter Thinking approach.

The Current Rules

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Where expenditure qualifies for relief under the current SME scheme, a company can claim an extra deduction of 130% of those costs in calculating the company’s taxable profits. Including the original spend, that means the company obtains a total deduction of 230% of the expenditure.

If the SME is loss making for the period, then they may be able to surrender all or part of the loss and claim a repayable tax credit from HMRC. This tax credit is calculated as 14.5% of the lower of the unrelieved trading loss and 230% of the qualifying R&D expenditure.

The Proposals

HMRC have identified attempts to claim R&D tax credits, despite having no R&D activity. They have also seen overseas R&D structures deliberately re-routed via the UK to claim R&D tax credits despite there being little employment or activity in the UK.

To counter these, the Chancellor announced that from April 2020, the payable R&D Tax Credit will be capped to three times the company’s total PAYE and NICs liability for that year. To minimise the impact of this measure on ‘genuine’ companies, HMRC is consulting on how this measure should be implemented.

Our Submission

In our submission, we wanted to highlight that applying a cap risks introducing an adverse financial burden to certain categories of company, such as start-ups, where payroll costs may be low as the founders forego high salaries in favour of building their company or utilise external subcontractors.

We are concerned that HMRC are overly focussed on the administrative burden that these measures may place on companies and themselves however, and we feel that the concern to most small businesses at risk from this cap is likely to be financial.

The Threshold

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Given the additional ‘administrative’ burden the government is concerned this measure may introduce, they are considering applying the cap only to R&D tax credit claims above a ‘threshold’. This would exempt the smallest businesses.

The consultation indicates a threshold value of £10,000, which based on our experience would not offer protection to the majority of genuine claimants. We have therefore urged the government to consider a significantly higher threshold value.


Shared Staff Costs

To claim more than the threshold level, a company would need to calculate its maximum claim by multiplying its entire PAYE and NICs liability for that year by three. However, R&D Tax Credit claims are calculated on a company-by-company basis but groups are not always organised that way.

For example: a project may require the expertise of staff from a sister company. This will result in cross charges, with only ‘external worker’ costs, but no PAYE in the R&D Company!

The government has suggested allowing connected party PAYE and NICs of other companies that relate to workers engaged in the R&D to be included in the above calculation of the maximum claim. We would applaud this solution and encourage the government to adopt it as it seems essential for the practical operation of the cap.


On a less welcome note, the government only proposes to allow one ‘below-threshold’ R&D Tax Credit claim per group of companies. While it is felt this could limit abuse, we feel the penalty for genuine businesses would be too high, as innovative groups, or even serial entrepreneurs are not known for limiting themselves to a single activity.

Unused losses

If a company’s R&D Tax Credit is restricted by the cap; for example:

Original R&D Tax Credit based on existing rules (i.e. 14.5% of total losses)

less 3x the PAYE and NICs liability of, say, £6k

Carried forward losses (£12k/14.5%)

Carried forward loses can be used against future profits as normal. However the consultation suggests that these losses could still be surrendered in return for the capped R&D Tax Credit amount (£12k) once the company has built up enough PAYE and NICs in a future year.

This would only be useful:

  • once PAYE and NICs have increased enough to cover both the R&D Tax Credits from future years and the capped amounts carried forwards, and
  • before the company becomes profitable and the losses can be set against these, giving greater savings.

Regrettably, the consultation only proposes to allow losses to be carried forward for 2 years which seems an overly tight window to expect all new businesses to increase their workforces. We therefore feel a longer period would be more appropriate as expressed in our consultation response

What next?

Overall, this is a well thought through consultation that would benefit from a small number of changes to ensure it better fits commercial businesses and does not adversely impact the genuine companies that R&D Relief aims to promote.

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