There are a number of factors that can impact a company’s R&D Tax Claim, in the construction industry this is mainly; SME vs. RDECs, the PAYE contributions cap and the proportion of subcontractors to PAYE.
SME vs RDEC
There are two schemes in place to enable companies to claim R&D tax relief, qualifying under the SME or RDEC scheme is dependent upon the size of the company submitting a claim. Quantifying metrics are turnover and staff. SME’s are able to claim up to 25-33% of their qualifying expenditure including subcontractor costs whilst companies falling under the parameters of the RDEC scheme can claim between 8-12% of their qualifying costs. However, companies typically qualifying under SME may fall subject to RDEC guidelines should they themselves be subcontracted by an RDEC company. This is dependent on a case by case basis.
PAYE contributions cap
Coming into effect from 1st April 2021, HMRC’s latest anti-abuse measure for the SME R&D relief scheme is the PAYE contributions cap. This legislation targets companies specifically routing subcontractor costs through UK entities in order to utilise the scheme. Once in effect, companies will only be able to claim £20,000 in addition to 300% of their employee PAYE & NIC liabilities. Subsequently, this will impact industries or companies that are heavily reliant upon subcontracted labour. The ramifications of the new legislation will begin to effect claims filed from late April 2022.
The proportion of Subcontractor to PAYE
Company’s claiming R&D relief through the SME scheme are eligible to include a proportion of their subcontractor costs. However, those with a disproportionate number of subcontractors to PAYE staff will ultimately receive a reduced benefit. This is due to the claimable expenditure for subcontractors being capped at 65%. This implies subcontractor costs are scaled down to 65% of any R&D qualifying expenditure. Whereas costs relating to a company’s PAYE staff are not subjected to this cap and therefore receive optimised value for any R&D related work.