The Impact of the New PAYE and NIC Cap on SME R&D Claims
With the PAYE and NIC cap upon us, it’s time for an update on their impacts. These features will officially come into play starting April 1, 2021, at which point businesses will only be able to claim tax credits worth up to 300% of their combined PAYE and NIC liability, with a £20,000 buffer. Any amount higher is forfeited.
The intention is to reduce the number of fraudulent claims – an issue which has been on the rise. However, it may also result in reduced claim relief for legitimate startups. There are some measures in place to reduce this impact, but some businesses will be affected regardless.
How it works
The claim is capped at £20,000 plus three times the company’s “relevant expenditure on workers”. This relevant expenditure extends to:
- Total PAYE/NIC liabilities for employees and directors – regardless of R&D involvement
- PAYE/NIC of any connected EPW
- PAYE/NIC of any subcontracted R&D – restricted to the usual R&D apportionment
Fundamentally, a capped R&D tax credit results in a lower amount of cash received. Usually, a company carries this credit forward to help fund more projects in the next year, creating greater innovation capabilities. The cap could potentially disrupt or reduce this pattern, bringing innovation rates down.
Exceptions to the cap
For certain SME’s, you may find yourself an exception to the cap. There are three features built into the legislation designed to help mitigate impacts and protect legitimate small businesses.
The £20,000 grace amount is exempt from the cap. This means any claim below this is uncapped and there is no reduced credit. This is a great feature for those companies with small employee numbers.
Staff costs from related parties are included in the PAYE and NIC liability calculations, assuming they are connected to the R&D.
The Two Test exception. A company’s claim can be uncapped if it meets these two tests – regardless of claim size. The first test requires that the employees are “creating, preparing to create or actively managing intellectual property”. The second test requires that fees for subcontractors or externally provided workers account for15% or less of a company’s R&D expenditure.
What to do if you are affected
Regardless of the mitigative measures, you may still be impacted by the cap. Reviewing previous claims is the best way to determine whether you will be impacted in the future. The best approach to maximize your R&D tax credit will depend on your circumstances. It would be best to plan ahead on this front, as there is nothing worse than the HMRC catching errors – then it’s already too late. Take the time to review, perhaps get advice from R&D experts, and have a plan in place.