R&D Tax Credits and the SME PAYE & NIC Cap

 

Due to changes in government legislation, SME companies that are completing their R&D tax credit claim for 2021-2022 could be affected by the PAYE & NIC Cap.

What is the HMRC PAYE Cap and why is it being introduced?

R&D Tax Credits PAYE CapThe R&D Tax Credit scheme is a core part of the government’s support for innovation; however, over recent years the scheme has become a target for increased fraud and abuse. The new measure responds to this by ensuring that the relief goes to only those who should receive it.

The PAYE Cap limits the amount of payable R&D tax credit which an SME can claim to £20,000 plus three times its “relevant expenditure on workers” i.e., 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.

When is the PAYE Cap being introduced?

The PAYE Cap will affect SME companies claiming R&D tax credits and will take effect for accounting periods beginning on or after 1st April 2021.

For example, if you have a December year end, this means the first accounting period for which the cap will be applicable is year ending 31st December 2022.

Which businesses could be impacted by the cap?
  • Early-stage unprofitable businesses with minimal payroll expenditure and therefore relevant staff costs
  • Companies that are structured to incur expenditure on workers who are subcontractors and/or agency workers (including overseas workers)
  • Innovative loss-making business(es) seeking to claim payable credits in excess of £20,000.
Example of the R&D tax credits PAYE cap

To recap, the limit only applies when looking at companies claiming payable tax credits. The amount of the cap is equal to £20,000 plus 300% of a company’s PAYE and NICs liabilities for that year.

Note that when calculating the PAYE/NIC cap, it is not limited to PAYE and Class 1 NIC associated with its qualifying R&D staff — it should include all staff. Here’s an example of how this looks in the practice:

Company “A” is a loss-making innovative company seeking to claim an SME tax credit of £60,000 on its tax credit claim for its year ending 31 December 2022. This repayable amount claimed exceeds £20,000 and therefore, company “A” should calculate its total PAYE and NIC liabilities for the year as a first step.

Company “A” has a total PAYE/NIC liability of £10,000 for the year.

Calculation: 3 x £10,000 = £30,000 i.e., 300% of the total PAYE & NIC and, therefore, the ‘PAYE cap’ is £50,000 for the period (£20,000 + £30,000).

The company can claim the lower of £60,000 (R&D relief seeking to claim) or £50,000 (PAYE cap) so there is a restriction in this instance i.e., the R&D tax credit is capped at £50,000 and Company “A” can claim £10,000 less of what could previously be claimed.

R&D Tax Credit
PAYE/NIC Liability
PAYE cap (£10,000 x 300%) + £20,000
Capped R&D Tax Credit
PAYE Cap Calculation Company "A"
£60,000
£10,000
£50,000
£50,000
Is there an exemption to the cap?

By default, a company’s claim is exempt from the cap automatically if a claim is less than £20,000. This is beneficial for SMEs with a few employees or directors taking limited salaries or bonuses.

A company can also be exempt from the cap for any size claim if it meets both the following criteria:

  • Employees are creating, preparing to create or managing Intellectual Property (IP) and
  • It does not spend more than 15% of its qualifying expenditure on subcontracted R&D or externally provided workers (EPW’s).
What happens next?

Libcus sees the PAYE cap as a positive change to prevent further abuse of the scheme. However, the change may have negative consequences on smaller companies submitting R&D claims, potentially decreasing their entitlement by thousands of pounds.

If you are completing your claim for 2021-2022, it is important that you are aware that these calculations may need to be considered and how this could affect your claim value. Effective planning will mitigate the impact of the cap.

If you are confused or unsure about how the new cap will affect your R&D claim please get in touch. Our technical specialists are up to date with the latest legislation changes and are happy to discuss your claim or answer any questions you may have. Please contact us on 01629 810 222 or info@libcus.com.

For further information on the legislation changes please click here to visit the government website.