Budget 2018: Return of PAYE cap for R&D

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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.

Unintended consequences

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.

About David O'Keeffe

I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on R&D tax relief, Patent Box and Creative Industry reliefs.

I have been involved with the UK’s R&D tax relief regimes since the initial consultations on the introduction of the SME relief.  In that time, I have developed an enviable level of knowledge of R&D tax relief both from a technical and a practical perspective. I established KPMG’s specialist R&D tax relief team and was a founder member of KPMG International’s Global R&D Tax Incentives Group and was a member of the Steering Group, with direct responsibility for the EMEA region.

I have provided input and consultation to many organisations and trade bodies. I was the only R&D tax specialist to have input to Sir James Dyson’s influential 2010 report "Ingenious Britain: Making the UK the leading high tech exporter in Europe" which is seen as the catalyst for reform of the UK’s R&D Tax Relief regimes. I have been a member of HMRC’s R&D Consultative Committee, a group with representatives from Government (HMRC, HMT and BIS) as well as industry, advisers and professional bodies, since its inception. I sit on CIOT’s CT technical Sub-Committee and chair the R&D Working Group of that sub-committee.

I was involved with the consultation process leading to the introduction in 2013 of the UK’s patent box regime. Since then I have helped his clients assess the merits of making a patent box election and then, where appropriate, to claim the benefit of the relief. More recently, I have actively contributed to the consultations around the design of the changes to the UK’s patent box to make it compliant with the OECD’s nexus requirements.

Formerly a Tax Partner with KPMG LLP (UK), I retired in 2011 to establish Aiglon Consulting.

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