HMRC regulations for R&D tax relief

R&D tax relief benefits many companies that are involved with developing new or improving products, services and processes. The incentive introduced in 2000 by the UK government is a generous source of funding for companies.

In 2018 HMRC detected and prevented £300 million worth of fraudulent and incorrect R&D tax claims. This has forced change to prevent future fraudulent claims.

A vast majority of these fraudulent claimants are UK companies that outsource their development to companies outside of the UK. These UK companies usually have no UK employees.

The UK company makes a loss in the year and then surrenders the loss in exchange of payable R&D tax credits.


The crackdown HMRC is putting in place will prevent the amounts a loss-making company can receive from payable R&D tax credits.

This will work by capping the payable R&D tax credit by £20,000 plus 300% of the relevant expenditure of workers of the claimant. This means companies claiming £20,000 or less in payable R&D tax credits will be unaffected.

The relevant expenditure of workers includes:

  • the PAYE (total income tax paid) and NICs liability
  • staffing costs incurred by a connected company that provides externally provided workers (EPWs)
  • staffing costs incurred by a connected company that undertakes subcontracted work

This new rule does not affect the amount of enhanced R&D cost claimed by the company, only the amount it can surrender for R&D tax credits. Any R&D costs that can not be surrendered can be used as a normal trading loss i.e. against current year income/gains, carried back, carried forwards or group relief.

This new measure will be effective from accounting periods starting on or after 1 April 2021. For accounting periods starting before 1 April 2021 and ending on or after 1 April 2021, the accounting period will be treated as two separate periods, with the second period starting from 1 April 2021.

An exemption exists for employees creating, planning to create or managing Intellectual Property, where the claimant does not spend more than 15% of its qualifying R&D costs on connected subcontractors or connected externally provided workers.

This cap ensures R&D tax credits go to companies that have a UK presence as after all, the scheme is to boost the UK’s innovation with the aim to support the Government's goal of reaching R&D spending of 2.4% GDP by 2027.

The legislation has been written in such a way that the 300% cap can easily be increased in subsequent years.

An estimated 95% of companies will be unaffected by the changes.

Inevitably there will be some companies that fall into the cracks. These companies will include start ups that have used their funds to outsource work due to a lack of technical staff available or for “cheaper” labour.

Something HMRC could introduce, in addition, is that companies that are subject to the cap can go through a more vigorous HMRC check. After passing this check, they would no longer be subject to the cap.

The technical expertise of the R&D tax consultants will be tested with these changes. The consultant will need to ask more detailed questions to the accountant and the claimant.

It is important to work with an R&D tax consultant that has experience of writing technical reports and has a background in taxation so they can understand the legislation and identify changes and spot opportunities for clients.

Our approach at GrowthPad is to work closely with our accountant partners to ensure our mutual clients are provided with a great service and that the R&D claim is strong, backed by a robust technical report.