R&D Tax Relief Changes from April 2020 will penalise new Tech start ups
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It is not uncommon for new technology start-ups to attract software engineers by offering a profit share and a stake in the company rather than large salaries that incur PAYE and NIC.
This saves costs but from April 2020, a company with no PAYE and NIC cannot claim a cash refund on expenditure relating to R&D.
Furthermore, any refund due from HMRC will be capped at 3 times the PAYE and NIC bill for the company.
For example, we have a start-up company designing portable energy-saving light switches and sensors. This is funded from personal savings to provide his company with funds to purchase materials for prototypes and pay engineers to ratify his designs.
He pays himself a small salary of £8k so he pays no PAYE and NIC but claims cash back from HMRC of around £9k on the costs of his time, materials and engineers. This effectively covers his salary costs.
From April 2020, he will have to consider raising his salary and incur PAYE and NIC to ensure that he can claim cash back from HMRC on all his R&D time and costs. There is still a benefit to claiming the R&D but there is a cash flow cost in that PAYE and NIC is paid monthly. The refund is made by HMRC when the accounts and claim
Directors of R&D intensive companies should consider an increase in salaries to get the extra cash refund from HMRC compared to the immediate cost of PAYE and NIC.