2 minute read
The incoming cap on SME R&D tax relief claims
In one sentence: From 1 April 2021, SME’s claiming a tax credit of more than £20,000 will need to check to see if they are affected by the PAYE/NIC cap, of 3 x PAYE/NIC costs + £20,000.
Why is this happening?
Advertisement
The government is concerned that some companies might be using loopholes to make R&D claims that they are not entitled to. This change is designed to prevent this, without impacting genuine R&D work. It is possible that the net has been cast too far, however, and legitimate claims could be caught by the rules.
Will I be impacted by this change? If so how?
There will be no impact for profit making companies that use an R&D claim to reduce their tax. However, where a company makes a surrender of losses for a tax credit, they will need to make sure the threshold has not been breached. The cap on any credit received will be £20,000, plus three times the sum of all of the PAYE and NIC liabilities of the company, plus a proportion of the liabilities for any workers from connected companies that are used in R&D. For a company whose R&D costs are primarily staff salaries, it is likely that this cap will not be reached. This is a much more generous cap than the existing RDEC cap, both in terms of the multiplier and definition of relevant PAYE/NIC costs.
What type of legitimate companies might be worst hit?
Companies that make very large claims for non-staff costs are most likely to fall foul of the cap, particularly where they have a small number of employees and outsource a significant amount of their R&D work, especially if this work is outsourced overseas, where PAYE/NICs are not a consideration.
What exemptions apply?
Companies that can show they are creating or managing their own IP are eligible for an exemption to this cap. IP is widely defined here and could be patents, trademarks, registered designs, copyrights, know how, or trade secrets for example. There is a further condition that no more than 15% of expenditure can be subcontracted to connected (or group) companies. This could be an issue where, for example, a UK company makes extensive use of an overseas parent company’s staff for its R&D work, with a relatively small presence in the UK.
When do these rules take effect?
The new rules apply for periods starting after 1 April 2021, so in most cases, the first time the cap will need to be taken into account will be periods ending after 31 March 2022.
What should I do to protect my claim?
Every case is unique, and if you are concerned about a claim, it is best to get advice sooner rather than later. In many cases the exemption will be available even if the cap is breached. It will be important to keep evidence regarding the exemption to avoid costly enquiries later down the line, and in some cases a small amount of planning in advance could make the difference between an unrestricted cash credit and one caught by the cap.
To get in touch with Richard to learn more about our Tax and R&D services, please email
