Budget 2018: Return of PAYE cap for R&Dby
The proposal announced in Budget 2018 will see the return of a PAYE/NIC cap for SME R&D payable credit claims, but not until 2020.
The original R&D legislation for the small and medium-sized enterprise (SME) scheme, introduced in FA 2000 included a PAYE/NIC cap. This was removed in FA 2012 for accounting periods ended on or after 1 April 2012.
The reintroduction of a cap is being positioned as an anti-fraud measure, with HMRC stating that it has already prevented £300m of fraud in situations including where structures had been set up deliberately to claim the payable tax credit despite having little or no actual employment or activity in the UK.
Given this is essentially an anti-avoidance measure, it is perhaps a little surprising that it will not be introduced until accounting periods starting on or after 1 April 2020. That will give HMRC time to consult on the details, which is welcomed.
Whilst it is clearly a good thing that the government is trying to stop this type of abusive R&D claim, a cap will inevitably impact claims from some companies who, for genuine reasons, have small PAYE/NIC liabilities. This was a particular criticism of the original cap, particularly for smaller companies, such as start-ups, with low PAYE/NIC liabilities.
It is reassuring to see, therefore, that this proposal is for a cap of three times the company’s total PAYE/NIC payment for the period, compared with the one times limit for the old cap.
There will still be smaller companies carrying out real R&D using agency workers rather than employees who will be caught by this proposal.
Payable tax credits only
It is important to note that the cap will apply only to claims for the payable tax credit, and it will not affect the calculation of the enhanced R&D expenditure itself.
Any amount of loss that cannot be surrendered for a payable R&D credit as a result of this cap will still be available for the company to carry forward in the normal manner.
That may be of little consolation for those smaller companies who currently benefit hugely from the cash flow advantage of the payable tax credit.
The legislation to make this change will be included in the Finance Bill 2019-2020.
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I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on areas such as R&D tax relief, Patent Box and Creative Industry reliefs, as well as IP tax issues more generally.
Formerly a Tax Partner with KPMG LLP (UK), I left in 2011 to establish Aiglon Consulting.