Research & Development – Tax Relief Cap

From 1 April 2021 a PAYE and NIC cap will be introduced for small and medium sized enterprises (SMEs) and may affect companies who claim the repayable R&D tax credit available under the regime.

What are the current rules?

At present, an SME making an R&D claim can obtain an enhanced deduction against their annual taxable profits. In the event that a company is loss making or the R&D enhanced deduction creates a loss, it is possible to surrender some or all of this loss to HMRC in return for a cash payment amounting to 14.5% of the loss surrendered.

What’s changing from 1 April 2021?

HMRC’s view is that the repayable tax credit element of the SME regime has resulted in a number of fraudulent R&D claims which have prevented genuine start-ups from accessing funding designed to encourage development and innovation. Their response is to introduce a cap on the level of repayable tax credit a company can obtain.

This cap will only apply to expenditure and losses arising after 1 April 2021. If an accounting period straddles this date, the period will be split into two to ensure that pre April 2021 expenditure and losses are unaffected.

There will be no change to the enhancement available on qualifying expenditure nor any repayable credit arising under the large company RDEC scheme.

How does the cap work?

The cap will limit the repayable R&D tax credit to £20,000 plus three times the company’s total PAYE and NIC liability for the accounting period.

Example

A Ltd is a loss making company and incurs £300,000 of qualifying R&D expenditure during its accounting period. It’s total PAYE and NIC liability is £5,000.

Under the existing regime A Ltd may be able to obtain a maximum cash repayment of £100,050 if it makes significant losses.

From 1 April 2021, the PAYE cap will apply to reduce the maximum cash repayment to £35,000 (£20,000 plus three times the PAYE and NIC).

Are there any exceptions from the cap?

Claims below the cap threshold of £20,000 will not be affected by this restriction so smaller claimants are unlikely to see any changes.

A company’s claim could also be unrestricted if the following two tests are met:

• The company’s employees are creating, preparing to create or actively managing Intellectual Property, and
• The company’s expenditure on externally provided workers or subcontractors does not exceed 15% of their total qualifying R&D expenditure.

How does this affect my company?

For many R&D claimants the introduced of the PAYE/NIC cap is unlikely to change anything. However, larger businesses who sub-contract a lot of their development work could see an impact to their cashflow and may wish to consider how their R&D activities are conducted in future.

We would encourage any R&D claimants who regularly claim tax credits under the SME regime to consider their future entitlement to the relief.

Should you have any concerns over the impact of the tax credit cap or have any questions relating to the R&D regime, please do not hesitate to contact us.