In the 2018 budget the government announced a cap on payable tax credits* of 300% of a company’s PAYE/NIC liabilities as an anti-fraud measure and a way to prevent overseas companies setting up a shell UK company and then diverting the funds received from an R&D claim offshore. 

However, there was concern the proposed cap would unfairly penalise small companies with few staff who use subcontractors for their qualifying R&D work and so the implementation of the cap was delayed whilst consultation took place. 

The consultation has now finished and draft legislation has been published which confirms that the cap will now apply for accounting periods beginning on or after 1 April 2021 with the following amendments:

• A company making a small claim for a payable tax 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:
  • The company’s employees are creating, preparing to create or actively managing intellectual property (IP)and;
  • The company’s expenditure on subcontracted work or externally provided workers provided by a related party is less than 15% of its overall R&D expenditure.

*A payable tax credit is a cash payment from HMRC generated by surrendering a company’s losses arising from an R&D claim.

Draft legislation can be fond here:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/934319/R_D_tax_credits_for_SMEs_-_Draft_FB20_legislation.pdf

If you have any questions on the payable tax credit cap or anything R&D related, please get in touch.

Posted: 17 Nov 2020