New PAYE Cap for SME R&D Scheme
From 1 April 2021, HMRC is set to bring back a limit on the payable tax credit a business can receive from a claim via the SME R&D Tax Credit Scheme.
This means businesses will only be able to claim tax credits up to the value of 300% of their combined PAYE and NIC liability (the first £20,000 will be exempt). Any amount over this limit will be lost.
The PAYE Cap is intended to prevent the R&D Tax Credits from being abused, but unfortunately for many businesses, this could reduce the relief available.
The cap specifically applies to businesses that are unprofitable, and businesses that end up with an ‘artificial loss’, which they could then surrender for a cash injection, because of the enhancement mechanism of the R&D Scheme. In these circumstances, subcontractor fees from businesses that are unconnected may be restricted from being eligible for R&D tax credits, as might salaries for overseas workers. However, you should still be allowed to include a fraction of the PAYE & NIC liability of a connected business that is delivering R&D activities for you.
However, you will still be allowed to include a fraction of the PAYE & NIC liability of a connected business that is delivering R&D activities for you.
Here’s an example to put this into some context:
A loss-making business has £100,000 of qualifying R&D expenditure. But a PAYE/NIC liability of only £2,000.
As the business is unprofitable, it should be able to claim 33.35% of its expenditure back as a tax credit of £33,350.
But as a result of the PAYE Cap, the business can only claim 300% of its combined PAYE/NIC liability, plus the £20,000 ‘grace amount’.
What does the mean overall?
The business’s tax credit is capped at £26,000, meaning an overall loss of £7,350 of funding.
For a small business that money could have had a huge impact.
There are some exceptions….
It’s not all bad news because there are some exceptions, which means not all small businesses will fall under the PAYE Cap regs.
£20,000 grace amount As mentioned earlier in the blog, the first £20,000 of payable tax credit claims will be exempt from the PAYE cap regulations. The outcome meaning, any claims under £20,000 will not be affected by the new regs. However, any claims over £20,000 will be capped in line with the new regs.
This feature is intended to protect much smaller companies.
Connected business costs can be included Businesses will be able to include the staff costs from connected businesses in their PAYE and NIC liability calculation if they contributed to the R&D Project.
This feature will benefit those smaller loss-making groups of businesses.
Intellectual Property & Subcontractors The final exemption is based on passing two tests. If the business passes both, the claim will be exempt. The first test is to meet the criteria of the Patent Box scheme. This test is, whether a business’s employees are “creating, preparing to create, or actively managing intellectual property”.
The second test is based on a calculation of fees paid to subcontractors and externally provided workers of connected businesses. This total amount must be no more than 15% of a company’s R&D expenditure.
The new regulations will come into force on 1 April 2021. However, claims from tax years ending before this date will not be capped. If your claim covers two tax years, it will need to be divided and calculated based on the two different accounting periods, and the introduction of the PAYE Cap. The PAYE Cap only impacting the amount in the period after 1 April 2021.
New regulations can often be confusing, especially for business owners who don’t have the time (or desire) to get their heads stuck into the rules. But that’s what we’re here for, we’ll guide clients through the process, so they don’t have to worry about a thing.
December is an incredibly busy time of year – it is for R&D too – but don’t let clients slip through the net, book a scoping call with Tim.