2020 saw some major changes in the history of the UK, few changes were brought by nature, in the form of a pandemic, and geopolitical decisions made by the UK government, like Brexit. Where the COVID-19 pandemic had profound structural impacts on the UK economy, Brexit is also expected to play its role in restructuring the economy of the UK for future years. Sectors like trade, finance, tourism, traveling, and entertainment are affected, and it also brought forward issues like regional disparities, economic crises, and tax amendments, which will leave their impact for years.
Since 31st December 2020, 11 AM, UK ceased to recognize EU State Aid Rules. EU and UK agreed to form their own individual bodies for subsidy control regimes under trade operation agreement. Now UK government will not be bound by EU laws, which will impact its policies and taxation. UK government provided a detailed document of “Summary guide to awarding subsidies” for the creation and implementation of ‘Subsidy Control Scheme’ from 1 January 2021
Keeping in view all the changes and challenges faced by the UK over time, many questions related to the fate of businesses are arising in the UK. One of the major concerns from businesses is regarding the future of R&D tax credit. SME scheme of R&D tax relief was previously regulated by the EU state Aid provisions (Article 107,108), but post-Brexit, UK is no more bound by the EU rules for its member states. Brexit gave UK more control over R&D tax credit.
For those who are not familiar with R&D tax credit, It is the UK government’s initiative to support innovation. Many companies are unaware of R&D tax relief and its worth and are uncertain regarding the eligibility of the claim. HMRC clarified that R&D tax relief is for those companies and projects which are contributing to science, technology, and innovation. All the things which are directly invested for advancement in the fields of science and technology are counted as R&D. Smaller companies can claim via SME scheme and large companies can claim via RDEC scheme of R and D tax credits. Loss-making SME’s can also claim up to 33% of their R&D expenditure.
Changes in R&D tax Credit
Some changes were made in the R&D tax credit policy in 2020 and proposed amendments for the 2021 Finance bill are:
- The UK government announced an increase in R&D tax credit for large companies from 12% to 13%, which can be claimed via RDEC (Research and Development Expenditure Credit).
- Certain development was also proposed for SME Research and Development tax credit. The UK government introduced ‘PAYE Cap’ to limit the amount of payable R&D tax credit to 3 times the total PAYE and NIC’s liabilities for a year, including £20,000. These changes made in HMRC R&D tax credit target fraudulent claims, made by the companies which claim Research and Development tax credit without actually contributing to an R&D. This step is taken to make sure that R and D tax credits go to deserving businesses only. This cap will take effect after 1 April 2021.
Effect of ‘Cap’ on the Businesses:
Most of the businesses are predicted to be not affected by this change in SME R and D tax credits.
- The cap will not be imposed on the business claiming for R&D tax relief in which employees work to create Intellectual property (IP) and have less than 15% agency workers.
- The cap will not affect the companies claiming payable R and D tax credits limited to £20,000.
- Loss-making SME’s will be provided R and D tax credits up to 14.5% where their losses are made.
- The new cap is expected to be introduced on 1st April 2021.
A majority of the businesses were affected by COVID-19 and to minimize its impact, HMRC assured to process 95% of claims within a short period of 28 days, which will help business with cash flow in this turbulent time of the pandemic. The HMRC has shown implementation of its commitments till now and is expected to continue in the future. As the UK is still under lockdown and facing uncertainties in these challenging situations, the smooth operation of business is proving to be really difficult. Thus, getting support from the government in the form of R and D tax credits is vital, since it is a source of funding for companies that are contributing to innovation.
Keeping all these changes in view, we can predict that in every eventuality Research and Development tax credit will be available to the companies post-pandemic and post-Brexit, as R&D tax relief has shown benefits in the past so there is no point in ceasing it. R&D tax relief is set to be claimable by both profitable and loss-making companies and the R&D tax credit system will probably remain healthy in the foreseeable future: as no significant reduction in R&D tax relief is expected. There are chances that R&D tax relief becomes more generous as the government is committed to keep Britain competitive and more support is needed by businesses in the UK to recover from Pandemic and Brexit. However, to prevent the UK government from superseding in a competitive market, there is prohibition on over-subsidising.
Moreover, there exists the possibility that in the future UK government can extend R&D tax relief to non-corporation tax paying businesses and thus attract more R&D business to the UK. This maneuver can prove to be advantageous for economic sustainability in Britain.
If you are curious to know more about R&D tax credits or have queries regarding claim and eligibility feel free to contact us.