PAYE cap on R&D Tax Credits

The R&D tax reliefs, including the SME R&D Tax Credits, are introduced as the government support schemes to encourage and support companies that are investing in Research & Development. It also supports the Industrial Strategy target of the UK spending 2.4 per cent of GDP on R&D by 2027. The R&D tax credits for SMEs are an extremely valuable support for loss-making companies. It allows companies to claim a tax credit worth up to 14.5% of the R&D loss and receive an immediate cash-flow benefit. 

Unfortunately, this scheme became a target of frequent fraud and abuse. In fact, HMRC has identified and prevented a number of fraudulent claims, worth over £300m in total. This measure was introduced to ensure the R&D Tax Credit relief goes to those firms who should receive it and prevent any future abuse of this scheme. The announcement was made during the Budget 2018 that the amount of SME payable R&D tax credit that a business can receive in one year would be capped at x3 times the company’s total PAYE and NICs liability. Further consultations took place and it was eventually it was confirmed that this measure will have effect for accounting periods beginning on or after 1 April 2021.

How this measure will work and who will be affected

This newly introduced measure limits the amount of payable R&D tax credit that an SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.

A company is exempt from the cap if:

• its employees are creating, preparing to create or managing Intellectual Property (IP) and
• it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

This measure, unfortunately, will affect some genuine small and medium-sized companies’ claims. To respond to this risk, the government introduced several solutions:

1) A threshold of £20,000 will be imposed to those seeking R&D Tax Credits repayment. If a claim is worth less than £20,000 in a single claim period plus three times PAYE/NIC costs, the PAYE/NIC cap will not apply. The PAYE Cap also won’t apply if the business is profitable and seeking a reduced Corporation Tax bill.

2) If a business’s repayable claim is more than £20,000, the maximum claim will be calculated by multiplying its entire PAYE and NICs liability for that year by 3 and adding this to the £20,000 threshold (i.e., £20,000 + 3 x PAYE/NICs).

Businesses will also be allowed to include the following in their PAYE/NICs cap calculations:

• Subcontracted work (PAYE and NICs) when the subcontracted business is a related party.
• PAYE and NICs for workers employed by connected parties, or by a company in the same group, that are working on the claimants’ R&D project.
• The PAYE and NICs of Externally Provided Workers (EPWs) provided by a related party working on relevant R&D.

If a financial year that the R&D PAYE Cap applies has been shortened or lengthened, then the PAYE Cap is apportioned accordingly. For example, a six-month year would have a PAYE Cap of £10,000 plus 300% PAYE/NIC.

If you need any support with your R&D Tax Credit claim, please don’t hesitate to reach out to us. We’re more than happy to guide you through the complicated rules and save your time on the application process.