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R&D Tax Credits & The PAYE/NI Cap

Background

The government consulted on the application of such a cap in Spring 2019.

Budget 2018 announced that, to deter abuse, the amount of SME payable R&D tax credit that a business can receive in any one year would be capped at three times the company’s total PAYE and NICs liability.

Following consideration of the consultation responses, the government published a summary of responses at Spring Budget 2020 and announced that changes would be made to the design.

It also announced that implementation of the cap would be delayed until April 2021 to allow for further consultation on the changes. The further consultation was published on 19 March 2020 and closed on 28 August 2020.

The government welcomes comments on the draft legislation by 7 January. 

Key components of R&D tax PAYE/NI cap

After considering views put forward in the 2020 consultation, the government is now confirming that the design of the PAYE cap will include the following features to minimise the impact on genuine businesses:

• a company making a small claim for payable credit below £20,000 will not be affected by the cap
• a company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap and these will be subject to the 300% multiplier
• a company’s claim will be uncapped, if it meets two tests. These tests require that a company’s employees are creating, preparing to create or actively managing intellectual property (IP) and that its expenditure on work subcontracted to, or EPWs provided by, a related party is less than 15% of its overall R&D expenditure
• draft legislation, an explanatory note, and a tax information and impact note (TIIN) has also been published.

The changes to R&D SME tax relief will be legislated in Finance Bill 2021 and will have effect for accounting periods beginning on or after 1 April 2021.

About the SME R&D Tax Credit scheme:

A popular and well-received scheme across companies in a range of sectors, R&D Tax Credits were launched by the UK government in the year 2000 for SMEs and 2002 for larger organisations. They are a core part of the government’s support for innovation, supporting the Industrial Strategy target of the UK spending 2.4 per cent of GDP on R&D by 2027 (See Industrial Strategy: building a Britain fit for the future)

The SME scheme is an especially generous one in that it provides either a discount in a company’s Corporation Tax or as a tax credit (payable lump sum) for enterprises that are making a loss. This lump sum tax credit option is great for SMEs as it means they can claim a payment up to the value of 14.5% of the R&D element of their losses.

The additional rate of tax relief under the SME scheme has also been boosted to 130%, meaning that once the normal corporation tax deduction has been taken into account, R&D tax relief can effectively reduce the cost of R&D by as much as 24.7% for a profit-making SME and 33% for SMEs that are loss-making.

However, because this tax credit effectively provides a lump sum payment to the business courtesy of HMRC, the government noted back in October 2018 that the tax credit scheme has become vulnerable to abuse. With cases of such abuse on the rise, the proposed cap is based on an organisation’s total National Insurance Contributions (NICs) and Pay As You Earn (PAYE) liability in any 12 month period.

This will help stop abuse in that businesses acting fraudulently (and those where UK-based R&D projects amount to basically just taking the payable credit) usually do not employ a lot of staff or pay NICs and PAYE.

Wondering whether your company qualifies for R&D Tax Credits?

Speak to the specialist team at Myriad Associates today and we can help you to decide whether your business meets the relevant criteria and whether any credits can be applied for the R&D projects you’ve undertaken. Simply call 0207 118 6045 or use our contact us page – we’ll be pleased to assist you.