The Government has issued new draft legislation that will look to establish a Pay as you Earn (PAYE) cap on R&D tax credit claims.
The cap was first announced in the 2018 Budget, with the objective being to put a stop to abuse of the R&D tax credit SME (small to medium-sized enterprise) scheme.
Under the original proposal, the amount of payable tax credit a qualifying, loss-making business can receive would be capped at three times the company’s total PAYE and National Insurance (NI) liability for that year.
Then, in the 2020 Budget, the Government confirmed that the introduction of the cap would be delayed until 1 April 2021 to allow for more time to consult on the changes.
The consultation process is now complete and after speaking with businesses, professional bodies and a variety of experts the Government has published its outcomes.
In its report it has confirmed that the design of the PAYE cap will include the following features to lessen the impact on claims from genuine businesses:
- A company making a small claim for payable credit below £20,000 will not be affected by the cap.
- A company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap and these will be subject to the 300 per cent multiplier.
- A company’s claim will be uncapped if it meets the following two tests:
- a business’s employees are creating, preparing to create or actively managing intellectual property (IP); and
- its expenditure on work subcontracted to, or externally provided workers (EPWs) provided by, a related party is less than 15 per cent of its overall R&D expenditure.
Whilst the new test may create more red tape, it should ensure that many SMEs won’t be affected by the cap and that only those attempting to misuse the system are targeted.
How can George Hay help?
If you require help with making an R&D tax credit claim or are unsure of how the new PAYE cap may affect you or your business, please speak to one of our friendly tax professionals, in Hertfordshire, Bedfordshire or Cambridgeshire.