What is the PAYE & NIC Cap on R&D Tax Credits?

In an effort to reduce companies taking advantage of the UK’s generous R&D tax credit scheme, HMRC introduced a plethora of compliance measures, including the Additional Information Form and the Claim Notification Form. One of the measures that is spoken of less (since it only affects a select few) is the PAYE & NIC cap.

This measure was brought in to reduce the risk of companies setting up UK companies and conducting all their R&D abroad, charging it through the UK vehicle and claiming R&D tax credits on work that offers limited benefit to the UK economy.

The PAYE & NIC cap affects the amount of cash credit that a company can claim. Only loss-making SMEs can claim a payable cash credit by surrendering their losses.

By tying the cash credit to a company’s UK staff cost liabilities (the Pay-As-You-Earn and National Insurance Contributions). The cap means that loss-making SMEs can only claim a payable tax credit of up to 300% of their combined PAYE and NIC liabilities, plus a £20,000 buffer.

HMRC defines this cap as £20,000 plus three times the company’s “relevant expenditure on workers.”

“Relevant expenditure on workers” should be interpreted as the total liabilities for PAYE and NIC for the company’s employees and directors (regardless of R&D involvement) plus PAYE and NIC of any connected EPWs or connected subcontracted R&D (restricted to the appropriate R&D apportionment).

This means all of your company’s staff and connected EPWs/contractors working on the R&D.

To minimise the impact on genuine businesses, HMRC does allow some companies to claim their payable tax credit even without the cap.

The following instances are exempt from the cap:

• A company making a small claim for payable credit below £20,000 will not be affected by the cap.
• A company’s claim of any size will be uncapped if it meets both of the following criteria:
  • its employees are creating, preparing to create or actively managing intellectual property (IP); and
  • its expenditure on subcontracted work or externally provided workers provided by a related party is less than 15% of its overall R&D expenditure.

For those claiming under the Merged Scheme, if the amount exceeds the cap, any excess is carried forward as an expenditure credit that you can claim in the next accounting period.

If you’re not sure on the caps or how this might affect a future claim, get in touch with the experts at Tax Cloud; we’re always happy to talk R&D tax credits.

When you use Tax Cloud, you can be sure that your claim meets all of HMRC’s requirements. We submit your claim to HMRC once we’ve reviewed and approved your claim. We know the regulations inside out, so you can focus on innovating.

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud