PAYE cap to prevent abuse of R&D tax relief schemes
In March 2020, the second consultation was published to discuss how to prevent abuse of R&D Tax Schemes by SME claimants and HMRC has identified and prevented a number of fraudulent claims, worth over £300 million in total.
Image courtesy TBAT Innovation Limited
The review considered the introduction of a cap to prevent fraudulent claims by ineligible businesses and those that re-route R&D costs conducted abroad through a UK business.
The cap was first detailed in Budget 2018 and is currently set to be implemented on the 1st April 2021. As it stands, the amount of SME scheme payable tax credit that a business can receive in any claim period will be subject to a cap of £20,000, plus three times the company’s total PAYE (Pay as Your Earn) and NICs (National Insurance Contributions) liability.
How will this affect businesses making R&D Tax claims?
It is clear that this cap will affect some genuine SME claims and the Government are trying to mitigate those affects in a range of ways. First, the government consultations offered an opportunity for stakeholders to provide their feedback and input to try and limit the impact. In addition:
To protect the smallest claims, a threshold of £20,000 will be imposed. Therefore, if a claim is worth less than £20,000 in a single claim period, the PAYE/NICs cap will not apply.
For businesses making a claim for more than £20,000, the maximum claim is calculated by multiplying it’s entire PAYE and NICs liability for that year by three and adding this to the £20,000 threshold (i.e., £20,000 + 3 x PAYE/NICs).
To maximise claims, businesses will be allowed to include the following in their PAYE/NICs cap calculations:
Subcontracted work (PAYE and NICs) when the subcontracted business is a related party.
PAYE and NICs for workers employed by connected parties, or by a company in the same group, that are working on the claimants’ R&D project.
The PAYE and NICs of Externally Provided Workers (EPWs) provided by a related party working on relevant R&D.
In addition, the claimant company can ignore the cap calculation if they are able to meet both of the following conditions:
They are undertaking significant management of the Intellectual Property (IP) arising from R&D.
The amount of eligible related party subcontractor/EPW R&D costs are less than 10% of the total qualifying claim in the period.
Sam Stephens, Director, TBAT Innovation Limited said: “The R&D Tax regime is a really important tool for both small and large companies, young and old. The cap that has been introduced to counter abuse but, even after consultation, will affect genuine businesses.
Moving forward, it is more important than ever to understand what shape and size a company’s claim may be and to ensure the right measures are taken to ensure the claim is maximised within the new constraints. Our experts at TBAT are always happy to discuss potential claims and ensure a robust and viable claim is made within the legislation.”