New draft legislation has been released by the Government that will look to introduce a PAYE cap on R&D tax credit claims.
A cap was first announced in the 2018 Budget to prevent abuse of the R&D tax credit SME (small to medium-sized enterprise) scheme.
Under the original proposal, the amount of payable tax credit that a qualifying, loss-making business could receive was capped at three times the company’s total PAYE and NIC liability for that year. As part of the 2020 Budget, the Government announced that the introduction of the cap would be delayed until 1 April 2021 to allow for more time to consult on these proposed changes.
This consultation process is now complete and after speaking with businesses, professional bodies and a variety of experts the Government has published its outcomes.
In its report it has confirmed that the design of the PAYE cap will include the following features to minimise the impact on claims from 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 per cent multiplier.
- A company’s claim will be uncapped if it meets two tests:
– a business’s employees are creating, preparing to create or actively managing intellectual property (IP); and
– its expenditure on work subcontracted to, or externally provided workers (EPWs) provided by, a related party is less than 15 per cent of its overall R&D expenditure.
While the introduction of the new test is likely to impact heavily on a small number of businesses, it should ensure that many SMEs won’t be affected by the new cap. We recommend that the possible impact of these rules is reviewed as soon as possible, to ensure that any changes can be made to the structure of your R&D function or engagements, and preserve entitlement to relief wherever possible.
If you require help with making an R&D tax credit claim or are unsure of how this change may affect you or your business, please speak to our expert tax team.