The government has announced a new cap on the amount of R&D Tax Credits that loss-making SMEs will be able to receive in a given year.
Unveiled as part of yesterday’s budget statement, the PAYE Cap will be set at three times a company’s combined pay as you earn (PAYE) and National Insurance contributions (NIC) liability, plus a £20,000 buffer.
The cap will take effect on 1 April 2021.
We support the policy’s efforts to make it harder for malicious and illegitimate companies to exploit the R&D Tax Credits system.
The R&D Tax Credits scheme is vital to promoting and de-risking innovation and R&D in the UK. HMRC is right to try and filter out claims from artificial corporate structures and overseas companies that don’t contribute to the UK economy.
While implementing a cap isn’t ideal, it’s good to know that the vast majority of companies – 95% by HMRC’s estimations – won’t be impacted. However, it’s clear that smaller startups – those with few or no employees – will be disproportionately affected.
This is troubling. Smaller companies contribute a lot to UK innovation and the economy. When HMRC removed a similar cap in 2011, many smaller companies became eligible for tax credits support for the first time. This was a real financial boon that fuelled development spending. We will urge HMRC to make sure smaller companies, with legitimate claims, continue to have adequate access to the scheme.
How will this affect me?
Your company is more likely to be affected if you are in one of the following situations:
- You’re using contractors – this cap is more likely to affect you if you use a large number of contractors. Contractor pay isn’t included in your PAYE or NIC liability. So it won’t contribute to your tax credits cap.
- You have overseas staff – PAYE and NIC liability only applies to employees based and taxed in the UK. So the salaries and taxes associated with overseas workers won’t contribute to your cap.
- You don’t have many employees – companies with few employees have a lower PAYE and NIC liability. They are consequently more likely to see their tax credits limited by this cap. So, if you’re a startup with no PAYE employees, you should consider putting some of your staff on your payroll so you can benefit from R&D Tax Credits.
The government has recognised that companies with legitimate claims on R&D Tax Credits might be impacted. They have therefore promised to consult on how to implement this cap to reduce its effect on legitimate companies.
HMRC will likely include the Research & Development Consultative Committee – a group of organisations involved in R&D Tax Credits – in this consultation.
As part of this Committee, we will work to make sure smaller startups with legitimate claims to R&D Tax Credits aren’t cut off from the support they need.
After all, so much of UK’s innovation takes place in smaller companies startups. They’re working to better our economic fortunes and brighten our future. We are proud to work with them and to help them receive the government support they need and deserve.
If you have questions about how this policy will impact your company, don’t hesitate to get in touch.
Our team of R&D Tax Credits experts will be happy to help.