Fergus WatsonR&D Senior Financial Consultantt
As our finance guru, Fergus also provides financial training to the rest of the team and supports our internal finance operations.
There are two PAYE caps on R&D tax claims, one for each of the claim categories: the large-company RDEC scheme, and the more recent SME PAYE cap. The RDEC cap has been around since the large-company scheme was established, but the SME cap is relatively new.
There are also exemptions to the cap which are aimed at companies undertaking R&D in the UK to ensure that the incentives are properly distributed to eligible companies.
What is the PAYE & NIC Cap for SMEs?
The SME R&D PAYE cap was introduced by the UK government to help prevent fraud and abuse of the research and development tax incentives.
The restriction itself is, for the most part, quite straightforward: it restricts the tax credit claimable by loss-making companies based on their PAYE/NIC liabilities during the year.
It applies from accounting periods that start on/after 1st April 2021 (i.e. generally accounting periods ended 31st March 2022 onwards, assuming a 12-month period).
The cap functions as follows:
The maximum payable credit* claimable is £20,000 plus 3x the relevant PAYE/NIC liability.
- PAYE/NIC for the claimant company is the total PAYE/NIC liability of the company
- The PAYE/NIC liability of individuals of Connected EPWs/subcontractors can be included at the % they undertake R&D – UK PAYE/NIC liabilities only – cannot include equivalents (EEA social security)
Note that the credit itself can be used against other corporation tax liabilities; in such cases, it would not lead to a restriction. Expert advice is recommended to make sure you are claiming correctly.
Who will the PAYE/NIC cap affect?
The cap is primarily aimed at loss-making companies whose headcount is low in relation to the overall size of the claim. In particular, it will affect those claims based on EPWs and subcontractors, and group companies where the majority of the R&D activity takes place overseas.
Exemptions to the cap
There are exemptions to the R&D PAYE cap which are aimed at companies undertaking R&D in the UK to ensure they’re not unfairly targeted. The exemptions are currently quite broad and can be subject to interpretation. We expect greater clarity around this legislation in due course.
What is the RDEC PAYE Cap?
The RDEC cap forms part of the 7-step process for determining the payable credit that an eligible large company can receive. Unlike the SME credit cap, the RDEC cap is well established and far less open to interpretation: there are no exemptions.
As with the SME scheme, the cap only applies to companies that are loss-making.
The cap is calculated based on the PAYE/NIC liabilities of the company’s relevant staff and connected EPWs:
- Staff that are included in the R&D claim (i.e. eligibility %>0%) have their full PAYE/NIC liability included as part of the calculation
- Connected EPWs have an equivalent proportion of their PAYE/NIC liability included in the calculation i.e. if 50% eligible, 50% PAYE/NIC included in cap calculation
If the net RDEC amount (i.e. post step 2) is greater than the PAYE/NIC liabilities of the R&D workers, then the excess is carried forward and treated as RDEC in the next accounting period. NB that if there is excess to carry forward, step 2 of the payment mechanism is skipped.