RDvault has analysed the new rules relating to the PAYE cap on R&D Tax credits which are going to come into effect on 1 April 2021
HMRC Recently Announced Details To The PAYE Cap On R&D Tax Credit Claims, Which In Essence Is Designed To Limit The Cashback (R&D Tax Credits) Businesses Can Claim Going Forward. The Rules Come Into Force For All R&D Expenditure Incurred From 1 April 2021.
So what is the PAYE and NI Tax Credit cap?
The PAYE Cap limits the amount of R&D tax credits (the cheque back from HMRC) to be:
- £20,000, plus
- Three times the company’s total PAYE and NIC liabilities in the period.
Example Of The PAYE Cap For R&D Tax Credits
Let’s say your company’s total PAYE and NIC liability for the period is £60,000. Then the maximum R&D tax credits you can claim is:
3 x £60,000
So the maximum you’d be able to claim is £20k plus £180k, which is £200,000.
As another example, let’s say a company’s PAYE and NIC liability is just £2,000, then the maximum R&D tax credits it can claim is (£20,000 plus 3 x £2,000) being £26,000.
Using the pre 1 April 2021 rules, assuming the R&D qualifying expenditure for this company is £100,000, and it is a loss making company, it would be able to claim £33,350 in R&D tax credits, however, in light of the new rules to be introduced from 1 April 2021, the R&D tax credits claim will be restricted to just £26,000.
But I read there are Exemptions to the tax credit cap, what are they?
The company employees are taking, or preparing to take steps for the company to create IP, creating IP or managing IP by making decisions in relation to the development or exploitation of the IP, and the company has the right to exploit the IP or jointly with others.
The amount a company pays to connected companies (or have jointly elected to be connected) for subcontractors and externally provided workers is no more than 15% of the total R&D qualifying expenditure.
So what happens on 1 April 2020?
Many articles on the internet are suggesting that these rules will only affect those claims for accounting periods beginning on or after 1 April 2021. This is INCORRECT!
Where a company’s accounting period started before, and ends on or after 1 April 2021, the company will be affected by this change in legislation (otherwise known as “the stradding period”).
In short, where an accounting period ‘straddles’ the 1 April 2021, then it is deemed to be “treated as [a] separate accounting period”.
So if your accounting period starts before 1 April 2021 and ends on or after 1 April 2021 you COULD BE affected by the new PAYE cap.
Example of a straddling accounting period
Say a company’s accounting period starts on 1 January 2021 and ends on 31 December 2021. Then the PAYE Cap rules will not affect the claim for the months January 2021 to March 2021. However, the rules WILL need to be taken into consideration for the months April 2021 to December 2021 (and beyond).
Need further help?
If you feel you could be affected by the changes to these rules, or if you would like to understand how these changes may impact your future R&D claims, then speak to our team by getting in touch here.