The PAYE Cap: How does this affect my clients’ R&D claims?

As expected, Budget 2021 confirmed that the PAYE/NIC cap on payable credits will come into force on the 1st April 2021. While this has been long expected, there’s still some confusion in the industry about how this will affect SME R&D tax credits claims, so here’s our quick guide!

When will I have to start taking account of the cap?

The applies to any accounting periods beginning after 1st April 2021, so it’ll be a few months before most advisors will have to start applying the cap when calculating the available tax credits. Claims for R&D tax made for accounting periods longer than 12 months that straddle 1st April 2021 will need to consider the cap for the period that starts after this date. For example, for a period of account of 18 months starting on 1 January 2021, the cap would be applicable from the accounting period starting 1 January 2022.

How does the cap work?

The amount of payable tax credit that an SME can claim is capped to £20,000 plus 300% of the company’s total PAYE and NIC liability for the period. So if a company has paid out, for example, £50,000 in PAYE/NICs in the claim year, the maximum tax credit it can claim is £170,000. This equates to a surrenderable loss of over £1m, and an eligible spend of £500-£900k. This is a huge amount for a company of 10-20 staff to spend, so you can see that the cap is unlikely to affect companies with more than a few staff.

Which companies are likely to be most affected?

The most affected companies will be small, loss-making start-ups who spend a lot on subcontractors. For example, a company with two directors on minimum salaries won’t pay anything out on NICs or PAYE. In this scenario, assuming that they make a loss for the year, the maximum tax credit they’d be able to claim is £20k (approximately £60-100k eligible spend).

Will the cap affect profitable companies?

The cap only applies to companies that are either loss making, or those that create a loss through the R&D enhancement, and who want to surrender the loss for a payable cash credit. It won’t affect the reductions in tax liability available to profitable companies, or companies that choose to carry forward losses rather than surrendering them.

Are there any exemptions to the cap?

A company is exempt from the cap if it is creating or managing IP, and less than 15% of the eligible expenditure is on subcontracting to or EPWs from connected persons. The legislation defines IP as ‘any patent, trade mark, registered design, copyright, design right, performer’s right or plant breeder’s right’, which is fairly narrow and means it’s unlikely that many companies will meet the exemption criteria.

How can I find out more?

Both the CIRD guidance and the legislation are available online.