HMRC have published draft tax legislation that includes the confirmation of the R&D SME tax relief scheme PAYE and NIC cap. The changes will be legislated in Finance Bill 2021 and will have effect for accounting periods beginning on or after 1 April 2021.
The original 2018 announcement set a cap for the SME payable R&D tax credit at 300% of a company’s PAYE and NIC liability. The legislation is the result of HMRC’s commitment to combat abuse of the SME R&D scheme with companies setting up some form of UK corporate entity, with little or no R&D being carried out in the UK simply to gain access to the valuable relief.
The announcement made today is now confirming how the PAYE and NIC cap will operate:
The payable R&D tax credit is limited to £20,000 plus 300% of its total PAYE and NICs liability for the period (not just on R&D qualifying staff). This means any small claim for a payable credit of less than £20,000 will not be capped.
A company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap at a 300% multiplier. There are rules about double counting which will need to be considered especially in group scenarios.
A company’s claim will be uncapped if it meets the following two tests:
- That its employees are creating, preparing to create or actively managing intellectual property; and
- That its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure. The key point here is the related party test as it supports HMRC’s motive in preventing abuse of the relief.
If you would like to discuss how this may impact your future R&D claims please contact a member of the CBTax team.