PAYE /NI Cap - Inspire Incentives | R&D Tax Credits

From 1st April 2021 changes have been introduced to the R&D Tax Incentives scheme that have been designed to reduce fraud and abuse.

The new steps will reintroduce a PAYE cap that will impact claims through the SME scheme where they are in receipt of a repayable credit, with a cap introduced on the value of the tax credit which can be claimed.

What does it mean?

Under the new rules, the amount of payable R&D tax credit an SME can claim’s limited to

£20,000 plus 300% of the total PAYE and Class 1 National Insurance contributions (NICs) liability for the period.
Companies claiming below £20,000 will be unaffected, this is to ensure small businesses who truly need funding aren’t restricted.
When calculating the cap, businesses will be able to include related party PAYE & NIC liabilities attributable to the R&D project.

There’s provision to prevent any PAYE or NIC liabilities counting towards more than one company’s cap, which is so-called ‘double counting’.

Exemption from the cap

Businesses will be exempt from the cap if they meet two criteria:

1. its employees are creating, preparing to create or managing intellectual property (IP); and
2. it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or on the provision of externally provided workers by, connected persons.

This will help those businesses with low employees who are solely focussed on developing IP, but similar with Patent box, documentation of the IP will be required.

Example

A loss making SME has an Eligible R&D spend £100k.

This is uplifted to £130k. Total enhanced expenditure of £230k.

The total PAYE/NI expenditure for the year is £3,000.

Prior to the PAYE cap, the SME would be entitled to a repayable credit of £33,350 (14.5% of £230k)

But now PAYE cap will be £20,000 + (300% * £3000) = £29,000.

So the repayable credit will be limited to £29,000, reducing the repayable credit by £4,350