Changes in PAYE and NICs caps for R&D tax relief
The general overview of this change is that the amount of SME payable R&D tax credit that a business can receive in any one year would be capped at three times a company’s total PAYE and NICs liability. The company would have to be a qualifying loss-making business in order to be eligible.
In the 2018 Budget, it was announced that a measure will be incorporated to deter abuse of the R&D Tax Relief Scheme. The first consultation on this change was made in 2019 but since then the Government has sought more responses; especially from businesses that would be affected by the cap. The cap was introduced in April 2021 and will take effect from then on.
It remains the government’s intention that genuine companies undertaking R&D should not, as far as possible, be adversely impacted by the cap. The government, therefore, announced that the cap would be set at 300% of a company’s PAYE and NIC’s liability, rather than the 100% PAYE cap that was in place until 2012.
The following points sum up the exemptions to the caps:
- a company making a small claim for payable credit below £20,000 will not be affected by the cap
- a company’s claim could be uncapped with the following tests. These tests require that a company’s employees are creating, preparing to create, or actively managing intellectual property (IP) and that its expenditure on work subcontracted to, or EPWs provided by, a related party is less than 15% of its overall R&D expenditure
The measure is expected to be monitored through information collected from tax returns. HMRC has predicted there to be a negligible impact administration-wise on 25,500 businesses claiming R&D SME payable tax credits. We, however, think that the impacts could be more significant than HMRC are making out. Especially, as they are notoriuous for underestimating the impact these things can have on a small business. In particular, the time it takes to implement these changes, which then drives up the cost to get it sorted through.
The changes in legislation are proposed to be revised to the following:
- New sections 1058A and 1058B of the Corporation Tax Act define ‘relevant expenditure on workers’ as the company’s own PAYE and NIC liabilities for the period (not just PAYE and NIC associated with its R&D) plus some PAYE and NIC liabilities of any connected persons doing subcontracted R&D for, or providing workers to, the company)
- There is also now a provision (section 1058C) to prevent any PAYE or NIC liabilities from counting towards more than one company’s cap (‘double counting’)
- New section 1058D sets out where a company can be exempt from the cap – where its employees are creating or preparing to create IP or managing IP (which is defined) and less than 15% of its R&D qualifying expenditure is spent with connected persons. These provisions are designed to exempt companies with low PAYE and NIC, but which are nevertheless themselves engaged in genuine, substantial R&D.
The above changes will be in the Finance Bill 2021.