Rob’s Reviews: The PAYE & NIC Cap

March 25, 2021

It has recently been announced that a cap on PAYE and NIC will be introduced for the R&D Tax Credits Scheme.

We sat down with our Senior Financial Consultant, Rob Elliott, to discuss the ins-and-outs of the cap.

The cap will be introduced as an anti-abuse measure following a substantial increase in fraudulent claims since a similar cap was abolished in 2012. It was deemed that fraudulent claims were threatening the integrity of the scheme where companies were either making claims with no genuine R&D, or where group structures had been set-up to re-route costs from outside the UK through a UK company.

The cap will affect claims for accounting periods beginning on or after 1 April 2021 and will restrict payable R&D tax credits for SMEs to £20,000 plus 300% of its Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liabilities for the period.

A company will be exempt if it:

  • Creates, is preparing to create or manages Intellectual Property (IP) and
  • Spends no more than 15% of its R&D qualifying expenditure on subcontractors or EPWs that are related parties.

In calculating the cap, companies will be able to use the PAYE and NIC liabilities of connected subcontractors and EPWs, if those workers have been involved in the qualifying R&D projects, although no individuals’ liabilities can be used in more than one cap calculation.

This is likely to have an impact on claims made by companies with low headcounts. This is typical of early-stage companies which may only have 1 or 2 staff, Director-run businesses, or business which rely heavily on subcontractors or EPWs which is common in software industries amongst others.

The smallest claims (those under £20,000) will be unaffected, as will claims where the company still has a trading profit after the R&D deduction. The cap only applies to tax credits on surrenderable losses.

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