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PAYE Cap on R&D Tax Credits | New Cap Will Limit Payable Cash Sum for Companies With Small Payroll Costs

by Adam Park | May 21, 2021

There's a new PAYE Cap on R&D Tax Credits and if you're working on an R&D project, you need to be aware of it. The cap will impact companies who have small payroll costs if they want to use their tax credit to take a payable cash sum.

If you're unsure what R&D Tax Credits are, or if they even apply to your business, take a look here.

What is the PAYE Cap on R&D Tax Credits?

In summary - the cap will limit the cash that loss making companies can access using the R&D Tax Credit scheme. It's designed to attempt to limit fraudulent claims, which include significant third party costs. But some legitimate companies are likely to get caught up in the cross fire. Here are the details:

  • The cap will limit the payable tax credit you can claim to £20,000 plus 3 times your companies PAYE and National Insurance Contributions for the year.
  • The cap applies to claims for any accounting periods starting on or after 1st April 2021.
  • It doesn't apply if you're using the tax credit to reduce your corporation tax. It only applies if you're surrendering part of your losses for a payable cash sum.
  • There are also two scenarios where the cap doesn't apply. Firstly if a companies employees are preparing or managing Intelectual Property. Secondly, if less than 15% of the costs related to R&D are paid to sub-contractors or Externally Provided Workers.

Will the Cap Impact Me?

To understand if this will apply to your business, you'll need to think about the following things:

  • Is your R&D taking place in an accounting period starting on or after the 1st of April 2021? If it's not then this cap won't apply to you.
  • Will you want to take a payable tax credit? If you're likely to be paying corporation tax in the upcoming year - you may not need to take a payable tax credit. You could just use the R&D tax credit to reduce your corporation tax bill.
  • Will your payable tax credit be larger than your cap? You will need to calculate what your 'cap' is likely to be. Start by estimating your PAYE and National Insurance Contributions for the year your R&D is taking place, then multiply this by 3 and add £20,000. Then compare this figure to your R&D expenditure. As a general rule of thumb if you're cap is less than 33% of your R&D expenditure - it may well impact your ability to take a payable cash sum.

What Should I Do If I'm Affected?

If you think the cap may affect you, there are steps you can take. By bringing more of the R&D in-house, you may be able to increase your PAYE and NIC contributions and increase your cap. If that's not possible, you may be able to apply for Intelectual Property for your advance, or manage the percentage of your costs paid to Externally Provided Workers or sub-contractors.

Any Questions?

Understanding the PAYE Cap on R&D Tax Credits can be challenging. If you need help, get in touch. We can help you determine whether this will impact you.

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