Budget blog: Chancellor announces cap on Research & Development (R&D) Scheme

31st October 2018

In order to combat perceived abuse of the R&D scheme, the Government has announced a restriction to the tax relief, effective from April 2020. However, only 5% of businesses eligible for R&D tax relief are likely to be affected.

Companies that make a taxable loss which is either created or enhanced by R&D expenditure will have a cap on the amount of payable tax credit that can be received. The cap will be set at three times the amount of the company’s annual PAYE liability.

This change does not affect the measurement of the R&D qualifying expenditure, and if losses are generated where a surrender of those losses would give a tax credit of more than three times the PAYE liability, the excess losses can be carried forward and utilised to set against future profits.

The Government has also announced that they are to consult on how the cap will be applied in order to minimise the impact on genuine UK businesses. It is suggested that up to 95% of businesses that currently claim payable tax credits will be unaffected by this measure and as such we do not expect to see claims made by genuine businesses being materially impacted by this measure.

The biggest challenge facing the R&D tax relief scheme continues to be underuse by smaller businesses, partly due to misperception that R&D is just about white coat research. To find out more about the scheme, including whether your business could be eligible, visit our R&D webpage.