IR35 & R&D changes - It’s not an April Fools’ Day article….
VAT has been abolished! Everyone to get income tax refunds! No need to file 2020-21 tax returns! OK, those would be April Fools’ Day stories, they aren’t true. But the following important changes to R&D claims and to IR35 which are coming into effect on 1st April are NOT.
R&D Tax Credits
Companies undertaking R&D work will know how valuable the R&D tax credits scheme can be, reducing profits or enabling a company to claim back cash from HMRC to help fund the work.
From 1st April, the rules have changed but only in relation to the amount that a company can claim back as cash.
In summary, for accounting periods beginning on or after 1 April 2021, the amount of payable R&D tax credit that a company can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and National Insurance Contributions liability.
Who might this affect? Mostly it will be companies that undertake R&D but do so by sub-contracting most of the work. With few or no staff on the payroll such companies obviously won’t be paying much, if any, PAYE or NIC so any R&D cash-back from HMRC would be limited to £20,000.
The benefit of an R&D claim would not be lost as any increased tax loss could be carried forward and used against future profits, so not a loss of the tax benefit but a deferral.
So, if you make or are thinking of making R&D claims do get in touch to discuss how the changes might affect you.
‘New’ IR35
New rules apply to IR35 as from 1st April. IR35 is considered where services are supplied by one company to another. The essence is that the rules ask the question “if the services being supplied were supplied directly by an individual rather than through a company, would that individual be consider an employee”.
The ‘new’ rules already apply if the customer is a public sector body and from 1st April apply to the private sector but only if the customer is not a ‘small’ business (see below*).
The change in the rules is that whilst previously, any challenge by HMRC would affect the company supplying the services, from 1st April it will be the business hiring those services. If HMRC successfully challenge the position, it would be the hiring company that had to pay National Insurance Contributions and had a PAYE tax liability.
Faced with this, many hiring companies are taking a ‘safety first’ approach and deeming that anyone they hire through that person’s company will be taxed ‘as if’ an employee. PAYE and NIC will be deducted and the net pay paid. Note that it will be ‘as if’ an employee. There won’t be any holiday or sick pay or employment law protection. So none of the tax advantages of being independent and none of the protection of being an employee.
Unfortunately there is not much that can be done if the hiring company decides to invoke IR35. It is theoretically possible to appeal but that could be seen as antagonistic and would be costly.
So do contact us if you think you may be affected by this to discuss your position.
(*a ‘small’ hiring company would be one with two or three of the following: Annual turnover less than £10.2m, a balance sheet total of less than £5.1m, fewer than 50 employees)
If you have any questions, don’t hesitate to contact us below: