New draft legislation has been released by the Government that will look to introduce a PAYE cap on R&D tax credit claims.
The 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 a qualifying, loss-making business can receive would be capped at three times the company’s total PAYE and NIC liability for that year.
Then in 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 the 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 may create more red tape, it should ensure that many SMEs won’t be affected by the new cap and should only target those looking to abuse the system.
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.