Cap on payable R&D tax credits – proposed changes to the R&D tax legislation
The proposed new legislation governing R&D tax relief for SMEs is fast approaching – and it could potentially affect the amount of relief claimable for thousands of companies.
The draft legislation for the long-proposed PAYE and NI cap on payable tax credits was issued in November 2020 and is due to take effect from 1st April 2021. The cap will limit the amount of payable R&D tax credit to an SME to £20,000 plus 300% of its total PAYE and NICs liability.
The aim of these measures was to prevent abuse of the scheme; however, the rules could cause an issue for genuine tax credit claimants whose claims are based on subcontracted employment and have limited employee numbers on the payroll, or who write off substantial consumable values in the course of their R&D activities.
The good news is that a company will be 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 means that if genuine third parties are undertaking the majority of the R&D on commercial terms the claimant company will not be affected by the cap as long as it maintains IP rights, which will generally be the case with most business arrangements.
Claimant companies should also consider that up to 300% of the PAYE and NICs paid towards EPWs can also count towards the cap. Confirmation and full details are expected in next month’s budget.
Whilst YesTax has made its position clear with regards to recent abuses of the R&D tax credit scheme, it also acknowledges that genuine claimants should not fall foul of the new rules when looking to claim this valuable tax relief. Planning your company’s structure to mitigate any risks relating to these changes is more important than ever, so please contact us at email@example.com if you have any questions about the new scheme.