On 12 November 2020, the details of the proposed Small and Medium-sized Enterprise (SME) Cap, which is due to come into effect on 1 April 2021, was published.
This cap is on the amount of payable credit that qualifying, loss-making SMEs can receive through Research and Development (R&D) in any one year, and will limit the refund to three times the organisation’s total PAYE and National Insurance Contributions (NICs) bill.
For many SMEs, they will meet the new principal tests, and therefore the cap will not be implemented.
To lessen the impact of this cap on legitimate companies conducting R&D, the Government has outlined the following guidelines:
- Companies can include related party PAYE and NICs, caused by the R&D project, when calculating the cap.
- Companies that claim payable credit below £20,000 will not be affected by the cap.
- Companies’ claims, of any size, can avoid the cap if they meet the two tests.
Firstly, the organisation’s employees must be creating, or preparing to, or actively managing intellectual property to meet the first test.
Secondly, an organisation’s expenditure on craft subcontracted to, or its external provided employees, by a related party must be less than 15 per cent of its overall R&D expenditure.