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HOME / KNOWLEDGE / SME R&D Tax Credit & the new PAYE Cap

SME R&D Tax Credit & the new PAYE Cap

R&D Tax Relief

Research and Development Tax Relief (R&D Tax Relief) helps innovative businesses undertaking R&D related activity claim a generous corporation tax deduction or a cash refund from HMRC.

HMRC have introduced a PAYE cap, restricting the amount of R&D tax credit claimable by SMEs each year.

Research and Development (R&D) Tax Relief helps innovative small or medium sized enterprises (SMEs) undertaking R&D related activity claim a generous corporation tax deduction or a cash refund from HMRC.

Profit-making SMEs can claim relief of up to 24.7p for every £1 spent on R&D by reducing their corporation tax bill, or receiving a corporation tax repayment on any corporation tax already paid. SMEs that are loss-making can claim relief of up to 33.35p for every £1 spent on R&D by receiving a tax credit or cash refund at 14.5%.

What is the PAYE/NIC cap?

In a bid to deter abuse of the generous scheme, HMRC have introduced a restriction for the amount of R&D tax relief received by SMEs in a year. Effective from 1 April 2021, the cap is set at £20,000 plus three times the company’s total PAYE and NIC liability for SMEs claiming R&D tax credits. It is important for all SMEs planning a tax credit claim to be aware of the new rules.

Example:
A Ltd is a loss-making business which carries out qualifying R&D activity. It has £200,000 of qualifying expenditure, and a PAYE/NIC liability of £10,000.

Under current rules:
A Ltd should be able to claim up to 33.35% of its expenditure as a payable tax credit worth up to £66,700.

Under new rules:
As a result of the PAYE/NIC cap, A Ltd will only be able to claim 300% of its PAYE/NIC liability, plus the £20,000 ‘grace amount’. This means that A Ltd’s payable tax credit will be capped at £50,000 – reducing funding by £16,700.

Who will be affected by the PAYE/NIC cap?

The cap will mainly impact SMEs that:

  • rely on subcontractors or external resources to carry out R&D activity,
  • have little or no payroll expenditure,
  • are planning to claim an R&D tax credit of over £20,000,
  • are recharging personnel costs between group entities,
  • are actively managing intellectual property (IP) outside of the UK.

Where a company has an accounting period that straddles 1 April 2021, the measure does not apply to the part of the period from 1 April, but instead, only affects the next full period starting after that date. For example, if the company has a February year-end, its 2021 and 2022 claim will remain unaffected by the new rules. However, the PAYE/NIC cap will affect its claim for the year ended 28 February 2023.

Exemptions

To minimise the impact of the cap on genuine businesses, the following exemptions apply:

  • 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 percent multiplier; and
  • A company’s claim, of any size, 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).
    • that its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15 percent of its overall R&D expenditure.

The new rules apply to all R&D expenditure incurred on or after 1 April 2021.

R&D Tax Relief

FURTHER R&D TAX ADVICE

CONTACT US FOR FURTHER INFORMATION, OR TO REVIEW YOUR R&D CLAIM.

R&D Tax Specialists Parminder Chattha

PARMINDER CHATTHA

Partner - Corporate and R&D Tax


Parminder specialises in Research & Development Tax Credits, leading the R&D department at Jeffreys Henry LLP. Since joining the Firm in 2015, he has been working closely with both SMEs and large businesses to analyse and maximise their Research and Development claims. He has so far secured over £70 million in R&D tax relief and credits for our clients.
SME R&D Tax Credit & the new PAYE Cap

KATE GREENHOUGH

R&D Director


Kate is a CTA qualified tax specialist with significant R&D tax experience. Kate has over 10 years of specialist experience in advising start-ups to PLC analyses, preparing and submitting robust R&D tax relief claims and Patent Box claims in line with the latest HMRC guidance. Her sector experience spans FMCG (fast-moving consumer goods), automotive, financial services, healthcare, manufacturing, construction, and food and drink.

FOR GENERAL INFORMATION ONLY. The information provided in this article is for general information only and does not constitute any specific advice or guidance. Whilst every care has been taken in the preparation of this article, it may contain errors and/or omissions. Always seek professional advice before taking any action. Last updated July 2021.

Bhimal Hira
Bhimal Hira

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