GrantTree analyses the final details of the PAYE Cap, and how it will impact your R&D Tax Credit claim.
HMRC has announced the final details of the PAYE Cap, a policy which restricts the amount of R&D Tax Credits a loss-making company can receive based on their workforce.
The announcement comes after two rounds of consultation with industry experts, and includes a trove of new information on how vulnerable companies could qualify for exemptions.
Here’s what you need to know about the cap, and how it could impact your business.
What is the PAYE Cap?
The PAYE Cap will prevent companies from claiming a payable tax credit worth more than 300% of their combined PAYE and NIC liability, plus a £20,000 buffer.
So, if you had a combined PAYE and NIC liability of £30,000, you would only be able to claim up to £110,000 worth of R&D Tax Credits.
Subcontractor fees from unconnected businesses, and salaries for overseas workers which don’t qualify for PAYE or NIC, will not be included in this calculation.
This means that businesses with few employees, or large international teams, are more likely to have their claim size capped.
The cap will take effect on 1 April 2021. Claims based on tax years ending before this date will not be affected, but things are more complicated if your financial year straddles 1 April.
Why does the PAYE Cap Exist?
The PAYE Cap is designed to protect the R&D Tax Credit scheme from abusive claims.
In particular, the cap targets artificial corporate structures which are formed for the sole purpose of extracting government funding.
While we applaud HMRC’s efforts, the first iteration of the cap could have deprived countless startups of much-needed funding.
Since it was first proposed, GrantTree campaigned for changes that would allow ‘genuine’ businesses to receive their full allowance of R&D Tax Credits.
Answering GrantTree’s calls, and those of our peers, HMRC has set out a range of conditions that would insulate genuine enterprises.
This is a positive step. But we believe HMRC should go further to ensure that no business is wrongly deprived of funding.
Which companies are exempt?
Following a second consultation, HMRC has published the full and final list of features for the PAYE Cap.
Features are caveats to the legislation which, in this case, spare certain legitimate companies from having their claims curtailed.
These features published today will be written into the upcoming 2021 finance bill.
Here they are, broken down.
Feature 1: The £20,000 buffer
The first £20,000 of a payable tax credit claim will be exempt from the cap.
Claims worth less than £20,000 will be completely uncapped, while claims exceeding this amount will be capped according to the following calculation:
PAYE Cap = £20,000 + 300% of a company’s PAYE & NIC liability
This financial buffer protects small companies with directors taking little or no remuneration, and with few or no employees.
Feature 2: Related party costs included
When calculating their PAYE Cap, companies can include PAYE and NIC costs from related parties that are attributable to the R&D projects in their claim.
This will benefit small, loss-making groups of connected businesses. Especially where one of the companies employs the bulk of the group’s staff.
A similar feature exists for companies claiming through the RDEC scheme.
Feature 3: The two tests
The final feature is tied to two connected ‘tests’.
The first test requires that a company’s employees be “creating, preparing to create or actively managing intellectual property”.
This mirrors the requirements laid out in the Patent Box scheme, a cousin of R&D Tax Credits.
The second test requires that the amount an applicant pays to connected businesses for subcontractors and externally provided workers must be less than 15% of their R&D expenditure.
If a company passes both of these tests, then their claim will be ‘uncapped’.
These two tests provide some protection for early-stage startups who recruit outside workers to develop their IP.
It also helps companies with high consumable costs, where prototypes are prohibitively expensive to produce.
If you have any questions about the PAYE Cap, and how it affects your claim, then please get in touch.
Our R&D Tax Credits experts will be happy to help.
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