R&D tax credits and the PAYE cap
What is the Finance Bill and why is it changing?
Every year a new Finance Bill is released detailing the rules on taxation for the year. Prior to the Finance Bill being finalised and released, the government publish draft legislation – on ‘Legislation Day’. This allows an opportunity to comment on, or suggest adjustments to, the legislation before it is finalised and the Bill is issued.
Could this affect you?
If your company undertakes research and development, has less than 500 employees, revenue of 100 million euros, and a balance sheet less than 86 million euros, it could be eligible to complete a claim for R&D tax relief via the SME Scheme.
When might this change affect you?
Whilst the legislation is still a draft at this point, this change has been consulted on throughout 2019 and 2020 and the government has confirmed the changes (as detailed in this article) should go ahead in the 2021 Finance Bill. This means that any accounting periods beginning on or after 1st April 2021 would be subject to the new legislation.
What is a payable credit and how could this new cap affect how much you can claim?
A payable credit becomes available when you have made a claim for R&D relief and are in a taxable loss position. HMRC will trade your losses in exchange for a payable cash credit, available at 14.5% of the loss.
- Currently (before 1st April 2021) this credit was capped at 230% of the qualifying R&D expenditure. For example, if you had £100,000 of qualifying R&D expenditure, you could surrender £230,000 of your losses in exchange for a cash credit at 14.5% (£33,350)
- Going forward (after 1st April 2021) an additional cap has been introduced and will relate to the total PAYE and National Insurance contributions liability that you had paid for the year. HMRC has stated that the total of this will be 300% of the total PAYE and NIC paid for the year. For example, if you had paid a total of £5,000 of PAYE and NIC for the year, HMRC would only pay up to £15,000 in the form of a cash credit. You would carry forward any losses not exchanged for a tax credit
But there are exceptions!
We’ve identified two exceptions to this new cap.
- If your company is making a claim for less than a £20,000 cash credit this will not be affected by the cap. This means that the amount of PAYE and NIC is irrelevant if your payable credit is £20,000 or less
- If your company’s employees are creating or preparing to create intellectual property (IP) AND less than 15% of your total R&D expenditure is expenditure related to Externally Provided Workers (EPW’s), then this new cap is also removed and you can claim a R&D tax credit ignoring the new cap
What if a lot of your R&D is completed by EPW’s?
It has been agreed that to allow companies to maximise the payable tax credit they can claim, that related parties PAYE and NIC liabilities relating to the R&D project can also be included when calculating the 300% cap for the tax credit. It’s worth noting that there will be provisions put in place to stop the same PAYE/NIC being utilised when calculating the payable cap for multiple companies.
What do you need to do?
For many claims this PAYE/NIC cap won’t change anything; your tax advisors may just ask for more information so that they can accurately identify the amount spent on PAYE/NIC.
For claims that are affected, this shouldn’t reduce the total value of benefit that you receive. However, it may mean that the cash credit that you claim is reduced. This will result in you being able to carry losses forward, as they won’t have been surrendered, and benefit from tax relief at the prevailing corporation tax rate when utilised – resulting in greater future tax savings.
Need more information?
If you would like to explore further how these changes might affect you and your business, get in touch with us for a free, no-obligation chat.