Key Highlights:
- If your R&D claims (cash back) is expected to be £20,000 or less in the future (over a 12 month period), then these rules will not affect the size of your R&D tax credit claim.
- We’ve worked out that if you are going to remain a loss making company and your qualifying R&D expenditure is going to be less than £60k per annum (i.e. you spend £60K or less on R&D expenditure over a 12 month period), then needn’t worry these rules won’t affect your R&D claim size going forward either.
- The maximum R&D Tax Credits (cashback) a company will be able to claim will be £20,000 plus three times the total PAYE and NI liability of the company in each accounting period (see how this is intended to work in the example below).
- Certain companies are exempt from these new rules and your Company may be too, (see section on Exemptions below).
- If you are a loss making company, have very few or no employees in your company, and your R&D spend is £60k or more, then you will most probably be affected by the new rules – read on!
- If you spend more than £60k on R&D expenditure and most of it is towards subcontractors or freelancers then these rules will affect you – you should definitely read on!
- These new rules will come into effect on 1 April 2021.
- These rules only affect the R&D tax credits SME scheme, the RDEC scheme remains unaffected by these new rules.
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:
The SUM of:
- £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
Example 1
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:
The SUM of:
- £20,0000, plus
- 3 x £60,000
So the maximum you’d be able to claim is £20k plus £180k, which is £200,000.
Example 2
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?
A company is exempt from the PAYE tax credit cap if either of the following two conditions are met:
- Condition A: 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.
- Condition B: 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).
RDvault software update
Our R&D tax specialists are closely monitoring the progress of the changes to the R&D tax legislation above, and working very hard to make sure these new changes are included in the RDvault platform. So if you are already using RDvault or considering speaking with us to make future R&D claims, our intelligent tax engine will be updated to include all of these changes.
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.
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