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Can My Client Still Claim R&D Tax Credits If They Don't Pay Any PAYE And NICs?

25th Oct 2019
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Are you a business accountant working on behalf of an innovative, forward-thinking client? Then they may be eligible for financial help towards the cost in the form of R&D Tax Credits.

The R&D Tax Credits scheme was set up by government in the early 2000s to encourage business investment in growth and innovation. It could see that growth is important to a healthy economy but that innovative work can be expensive which is how the relief came about. Essentially it allows companies to claim back a percentage of relevant R&D expenditure costs via a rebate on their Corporation Tax or as a lump sum - and the numbers are often substantial.

The scheme is open to just about any company that has Corporation Tax liabilities and the scope to claim is fantastically broad. This makes it well worth considering if any clients/companies currently on your books may have undergone any innovation work recently so that you can flag it up with them.

If this sounds like something your client may be able to benefit from, please do take a look at our R&D Tax Credits webpage to find out more.

My client doesn’t pay any PAYE or NICs - are they therefore barred from the scheme?

Companies can still claim R&D Tax Credits if they don’t pay any PAYE and national insurance contributions, providing all other eligibility criteria is met. Confusion has previously occurred prior to 2012, when companies were only eligible for a cash credit (not a Corporation Tax reduction) if they hadn’t paid any PAYE and NICs, but this is no longer the case. Essentially, companies may be able to claim R&D Tax Credits based on other eligible expenditure, even if salaries have not been drawn. The key point to note however is whether a business claims the relief via the SME R&D Tax Credit scheme or the Research and Development Expenditure Credit (RDEC) one, as this will affect how they claim. We will explore this further later on.

How to claim R&D Tax Credits under the SME R&D Tax Credit scheme with no PAYE or NICs

Most R&D Tax Credits are applied for using the SME scheme. Until 2012, businesses were not able to receive an R&D Tax Credit if they hadn’t paid PAYE or NICs. This often meant that companies in the start-up phase were excluded as no salaries were yet being drawn. This rule no longer exists which is good news all round.

Pension contributions and any expenditure on freelancers or subcontractors may also qualify for R&D tax relief. Other costs may qualify too, such as the cost of materials used up in the R&D project, as well as consumables like power, lighting and heating and some software costs.

Can my client include VAT in their R&D Tax Credit application?

No - VAT costs may not be included in a claim for R&D Tax Credits. The only exception to this is if a company’s VAT costs are not recoverable via a VAT return. Whether this applies to your client depends on their VAT classification.

VAT classifications and R&D tax credits

As you will be aware, the four VAT classifications are described as standard rate, reduced rate, zero rate and exempt. If your client is classified as zero rated, reduced rated or standard rated, they will be able to recover their input VAT (the VAT on their costs) in their VAT return. This means it is not possible to include VAT costs regarding their R&D expenditure in their claim for R&D tax relief.

However, if your client is classified as exempt, as would be the case for example with an insurance company, their input VAT can’t be recovered in a VAT return. It therefore makes up part of the goods and services to which it has been applied to. In this case, it can be included in an R&D Tax Credit application.

R&D expenditure that attracts VAT

Money spent out on materials, utilities and sub-contractors is likely to attract VAT, therefore it is essential that these are dealt with correctly according to your client’s VAT classification. That being said, staff costs are generally the most significant part of an application for R&D Tax Credits, and these are not subject to VAT. This means that in many R&D tax relief applications, VAT is not particularly relevant.

Claiming R&D Tax Credits under the RDEC scheme with no PAYE or NICs

For bigger companies, questions will most likely be asked around whether your client’s company is part of a group and if its salaries are paid from a company that isn’t UK based. Although this will not prevent your client from claiming under RDEC, it could affect when the benefit is received.

If the company receives its claim benefit by offsetting its Corporation Tax liability, then the absence of PAYE or NIC payments won’t have any effect on the claim. However, once a company’s Corporation Tax liability has been offset, they may also be due a cash credit which itself could be affected by PAYE and NICs. RDEC cash credits are restricted to the total amounts of PAYE and NICs paid for employees that have carried out R&D work included in a claim. The benefit is not lost however, as amounts above the cap can be carried forward for a future period. So, if your client has carried out eligible R&D activities it would be a mistake to not make a claim just because no PAYE or NICs have been paid.

How we can assist you

If your client’s company has undergone any R&D activities but has not paid PAYE or NICs, we can help you to help them. Only the last two accounting periods can be taken into consideration though, and the cash injection could have a hugely positive affect on their business so make sure they don’t miss out.

As your client’s business accountant you will be assisting them with all of their tax affairs, and finding the time (and the brain space) for R&D tax relief claims can be a challenge. It is also a highly specialised area, and the potential to get it wrong is very real.

At Myriad Associates we deal solely in R&D and nothing else, leaving you to get on with the day job. We will work with you to identify whether your client may be eligible to apply for R&D Tax Credits, regardless of whether they have paid PAYE and NIC, and will help in any way we can.

Contact Myriad Associates today

If you have a question about any aspect of R&D tax relief, we’re here to help. We have many years’ experience in this area and have offered professional support to companies up and down the country in bringing about a successful R&D Tax Credit claim.

No matter where your client is in the application process, call us today on 020 3994 2449 or use our contact form and we’ll get back to you.