PAYE/NI Cap for SME R&D Tax Credits – What You Need to Know
As summer 2022 gets into full swing, many companies which claim R&D tax relief are now feeling the effects of a new rule which was introduced last year. The legislation for the PAYE and NI cap on payable tax credits impacts accounting periods which begin on or after 1st April 2021. This means that companies with 31 March 2022 (or later) financial year ends now have to consider the cap rules. At YesTax we’ve already prepared several claims where the new rules have to be considered. But what are the cap rules?
Effective from 1 April 2021, the newly introduced cap is set at £20,000 plus three times the company’s total PAYE and NIC liability. The cap only relates to companies claiming under the SME scheme and which are surrendering tax losses for the payable 14.5% credit. Profit making companies, which are still liable to corporation tax after the R&D enhancement has been applied, are not affected.
The new rules are largely the result of increased abuse of the scheme over the years. In recent months, HMRC have announced further measures to reduce fraud and error within the R&D tax regime and the new cap rules are just one of a number of counter-measures that HMRC are currently employing to disrupt the widespread abuse of the system.
To minimise the impact of the cap on genuine claimants, the newly introduced legislation includes exemption criteria where the cap will not apply.
A company will be exempt from applying the cap rules 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.
Many genuine businesses which are developing new technologies are likely to meet the two exemption criteria. This is welcome news as any measures to counter fraudulent behaviour should not impact those companies which have valid claims to the relief. However, companies which have very little or no payroll costs and which utilise labour provided by other group companies are highly likely to be impacted. YesTax has already prepared a claim for a company which utilises other group company staff. The cap rules had to be considered but thankfully there was enough PAYE/NI swishing around the group for the R&D tax credit payment to remain uncapped!
Many companies which may fall foul of the cap rules should now consider how to structure R&D activity to ensure claims are maximised. At YesTax, we can advise how best to structure expenditure to ensure that the new cap rules do not adversely affect the company’s ability to claim R&D tax relief. Contact us at hello@yes.tax
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