Following extensive consultation, the Government has confirmed the design of the PAYE cap that will apply to SME repayable tax credits. The legislation is effective from 1 April 2021.
Summary
In summary, you should not be affected if your payable R&D tax credit is less than £20k per year (plus 300% of the company’s total PAYE/NIC liabilities).
Companies that may be affected are those with total PAYE/NIC liabilities that are disproportionately small compared to the company’s repayable R&D tax credit. For example, a company that uses external subcontractors rather than staff.
Potential solutions
Impacted companies might consider whether to employ staff rather than rely on external resource or whether more salary payments should be made (as opposed to taking dividends for example) to manage this.
Companies should also consider whether their claims can be uncapped because they create Intellectual Property* and subcontract out less than 15% of total R&D expenditure to related parties.
The detail
The SME cap is being introduced to prevent abuse of the SME R&D tax relief via claims being made by UK companies for excessive payments to connected parties, often overseas. The cap uses PAYE/NIC to limit repayments in certain circumstances.
The good news is that a number of features have been included to minimise the impact on genuine businesses, as follows:
- 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% multiplier.
- A company’s claim, of any size, will be uncapped if it meets two tests. These tests require that a company’s employees are creating, preparing to create or actively managing intellectual property* (IP) and that its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure.
*Intellectual Property is defined as any patent, trademark, registered design, copyright, design right, performer’s right or plant breeder’s right (or equivalent globally).
Get in touch to find out more and understand whether there is action you should be taking now to avoid your future tax credits being reduced.
