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How does the PAYE Cap affect my clients’ R&D claims?

  • April 2021
  • 3 minutes

Budget 2021 confirmed that the PAYE/NIC cap on payable credits will take effect on April 1, 2021, as expected. While this has long been anticipated, there is still some uncertainty in the industry about how this will affect SME R&D tax credits claims, so here is our quick guide!

taxqube When will I have to start taking account of the cap?

The cap will apply to any accounting period ending after April 1, 2021, so most advisors will have to wait a few months before they have to start applying it when calculating available tax credits. R&D tax claims for accounting periods beginning before April 1, 2021, and ending after that date must consider the cap for the period ending after that date.

taxqube How does the cap work?

An SME’s payable tax credit is limited to £20,000 plus 300 percent of the company’s total PAYE and NIC liability for the period. So, if a business pays out £50,000 in PAYE/NICs in a given year, the maximum tax credit it can claim is £170,000. This translates to a £1 million surrender able loss and a £500-£900,000 eligible spend. This is a huge amount for a company of 10-20 staff to spend, so you can see that the cap is unlikely to affect companies with more than a few staff.

taxqube Which companies are likely to be most affected?

The most affected companies will be small, loss-making start-ups that spend a lot on subcontractors. For example, a company with two directors on minimum salaries won’t pay anything out on NICs or PAYE. In this scenario, assuming that they make a loss for the year, the maximum tax credit they’d be able to claim is £20k (approximately £60-100k eligible spend).

taxqube Will the cap affect profitable companies?

The cap only applies to companies that are either in the red or that create a loss as a result of R&D enhancement and want to surrender the loss in exchange for a payable cash credit. It will have no impact on the tax benefits available to profitable businesses or businesses that choose to carry losses forward rather than surrender them.

taxqube Are there any exemptions to the cap?

If a company creates or manages IP and spends less than 15% of its eligible expenditure on subcontracting to or EPWs from connected persons, it is exempt from the cap. The legislation defines intellectual property as “any patent, trademark, registered design, copyright, design right, performer’s right, or plant breeder’s right,” which is a fairly narrow definition that means few businesses will meet the exemption criteria.

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