06 May 2022

R&D PAYE Cap – SME Scheme R&D Tax Credits Claims

Ian Davie
Senior Consultant

R&D PAYE Cap

From the 1st April 2021 the SME PAYE Cap is now live for any R&D claims for financial years starting after 1st April 2021.  The PAYE Cap has been introduced to prevent identified abuse mechanisms of the SME R&D Tax Schemes by SME claimants. HMRC has identified and prevented a number of fraudulent claims, worth over £300m in total, with conviction terms for perpetrators. Two consultations and reviews considered the introduction of a cap to prevent fraudulent claims by ineligible businesses and those that re-route R&D costs conducted abroad through a UK business or through connected parties.

The cap was first detailed in Budget 2018 and was implemented on the 1st April 2021 through the Finance Act 2021 S1058. As it stands, the amount of SME scheme payable tax credit that a business can receive in any claim period will be subject to a cap of £20,000, plus three times (300%) the company’s total PAYE (Pay As You Earn) and NICs (National Insurance Contributions) liability.

It is clear that this cap will affect some genuine SME claims and the Government has tried to mitigate those effects in a range of ways. Firstly, a threshold of £20,000 will be imposed for those seeking a repayable R&D tax credit. Therefore, 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.  Neither will the PAYE Cap apply if the business is profitable and seeking a reduced Corporation Tax bill.  If your financial year starts before the 1st April 2021 the R&D PAYE Cap will not apply.

For businesses making a repayable claim for more than £20,000, the maximum claim is calculated by multiplying its entire PAYE and NICs liability for that year by three and adding this to the £20,000 threshold (i.e., £20,000 + 3 x PAYE/NICs).

To maximise claims, businesses will 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.

In addition, the claimant company can ignore the cap calculation if they are able to meet both of the following conditions:

  1. They are undertaking significant management of the Intellectual Property (IP) arising from R&D. This can include trade secrets as well as patent protection IP strategies.
  2. The amount of eligible related or connected party subcontractor/EPW R&D costs are less than 15% of the total qualifying claim in the period.

For any financial year that the R&D PAYE Cap applies and the financial year has either been shortened or lengthened in the period, then the PAYE Cap is apportioned according to the length of that period.  For example, a six-month year would have a PAYE Cap of £10,000 plus 300% PAYE/NIC.

Director, Sam Stephens says “The R&D Tax regime is a really important tool for both small and large companies, young and old. The cap that has been introduced to counter abuse, but even after consultation, will affect genuine businesses.

Moving forward, it is more important than ever to understand what shape and size a company’s claim may be and to ensure the right measures are taken to ensure the claim is maximised within the new constraints. Our experts at TBAT are always happy to discuss potential claims and ensure a robust and viable claim is made within the legislation.”

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If you need any assistance understanding how this cap may affect your R&D Tax Credit claims, our team is here to help! Simply get in touch by completing the form below.

To begin a claim, you can also use our online R&D Tax Credit calculator to work out how much you could receive from HMRC.

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