From 1 April 2021, the rules regarding R&D (research and development) tax credit claims for the SME scheme are changing, which could affect some businesses’ ability to obtain the full amount of tax relief.
The new PAYE cap on qualifying R&D expenditure will attempt to tighten up the R&D tax credit system by limiting the amount of payable R&D tax credit that an SME can claim to just £20,000, plus 300 per cent of its PAYE & NIC liabilities for the period.
A company making a small claim for payable credit below £20,000 will not be affected by the cap, but those that are not exempt from this rule will face new challenges.
A company’s claim will be exempt from the new measures if it meets two tests:
- A business’s employees are creating, preparing to create or actively managing intellectual property (IP); and
- Its expenditure on work subcontracted to, or externally provided workers (EPWs) provided by, a related party is less than 15 per cent of its overall R&D expenditure.
Under these new rules, companies that are heavily reliant on subcontracted work for their R&D projects may find that they are limited as to how much tax relief they can obtain.
Due to these conditions, many start-ups, IT and tech companies that rely on subcontracted work and external expertise may struggle to make an uncapped claim.
Claims based on tax years ending before 1 April 2021 will not be affected. However, if a business’s financial year straddles this change, they will need to apportion their claim into two accounting periods.
It is important to note that the PAYE Cap only applies to the surrendered tax credit. It does not apply to claims where the R&D enhanced expenditure reduces a business’s Corporation Tax liability, or where losses are carried forward or relieved.