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Research and Development Tax Credits – PAYE Cap

Since the PAYE cap on R&D tax credits was initially mentioned in the 2018 budget, there has been a period of consultation and a delay due to COVID-19.

When does it apply?

This applies to the accounting periods beginning on or after 1 April 2021.

What is the cap?

The new rules will restrict the R&D tax credit claim for loss making SMEs.

In most cases, the R&D tax credit will be capped at £20,000 plus 300% of the company’s relevant expenditure on workers.

The relevant expenditure will usually be the company’s PAYE/NIC liability.  Also, it can include the PAYE and NIC of any connected externally provided workers and subcontractors.

A company’s claim will not be capped if it is creating or actively managing intellectual property and less than 15% of its total R&D expenditure is on work subcontracted to or using employees of connected persons.

How will this affect companies?

This is likely to have an impact on small loss-making start-ups.  These companies often have minimal salary costs, as directors are often on low salaries and they may also be using subcontractors.  They therefore do not have large PAYE/NIC liabilities, so their R&D tax credit may be restricted to £20,000.

Group companies may also be affected, if they recharge salary costs to other group companies.

Any remaining losses, can be carried forward and utilised against future profits.  However, particularly for start-ups, it may be several years before there are sufficient profits to relieve the losses against.  Therefore, this could have an impact on cash flow.

Why is the cap being introduced?

In the past it has been considered that many SMEs have claimed for projects which are not R&D and have been pushing the boundaries of R&D to maximise claims.  In addition, group structures have been set up to claim for R&D activities undertaken outside the UK.

The aim of the cap is to make the R&D legislation more robust and to prevent exploitation of the relief.

The next steps

For further information, get in touch with Sasha Talbot at s.talbot@uhy-uk.com or your usual UHY adviser.

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