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R&D Tax Reliefs for SMEs: PAYE & NIC Cap

Rebecca Underdown, Corporate Tax Assistant
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R&D tax reliefs and the ability for SME’s to surrender R&D tax losses for a payable cash tax credit from HMRC can be a crucial funding line for certain businesses, including start-ups. However, for accounting periods beginning on or after 1 April 2021, the amount of cash tax credit that can be claimed in any one year is to be capped.

The cap is set at £20,000, plus three times the company’s ‘relevant expenditure on workers’, being:

  • The company’s total liability for PAYE and NIC (for all workers, not just those engaged in R&D) for the claim period; plus
  • PAYE and NIC paid by connected companies where they provide externally provided workers or subcontracted workers to the claimant company (apportioned in line with the R&D costs).

Where the cap applies, only the part of the surrenderable loss within the cap can be surrendered for a payable credit. The balance of the loss is carried forward as a trading loss, to be used against taxable profits when they arise in the future.

A company’s claim of any size will be exempt from the cap provided the following conditions are met:

  • The company is creating or preparing to create intellectual property, or managing intellectual property which it holds. These activities must be undertaken largely by employees of the company, and the company must have the right (alone or with others) to exploit the intellectual property; and

Less than 15% of the company’s overall qualifying R&D expenditure is spent on subcontractors or externally provided workers from a related party.

What actions should be taken?

Loss making SME’s should consider the potential impact of the cap, particularly if they have:

  • low or no UK PAYE/NIC liabilities
  • utilise personnel of group or connected companies
  • utilise personnel outside of the UK or actively manage IP outside of the UK

For assistance in reviewing how the cap could impact your SME, please contact Emma Reynolds, Simon Crookston or Stuart Weekes.

Contact us

Stuart Weekes
Stuart Weekes
Partner, Corporate Tax
Thames Valley