In March 2020, HMRC published 'Preventing abuse of the R&D tax relief for SMEs: Second consultation'. It looked at the design of the PAYE cap being introduced to prevent abuse of the R&D payable tax credit. The new cap will apply from April 2021.
HMRC's initial 2019 consultation considered how the proposed PAYE cap would work in practice, whilst preventing fraudulent tax relief claims. The second consultation then sought feedback on how the cap would work regarding related party costs and Externally Provided Workers (EPWs), as well as ways to ensure that genuine businesses were not disadvantaged by the new rules.
Proposals from the first consultation have been confirmed in a new policy paper:
- Claims for payable credits of under the threshold of £20,000 will be exempt.
- Any claim for payable tax relief will be capped at the threshold (£20,000) plus 300% of the company's total PAYE and National Insurance Contributions (NIC) liabilities.
- The PAYE and NIC total is for the whole business, not just R&D related activities.
- This will include some costs where the payments relate to related party PAYE and NIC liabilities for sub-contracted R&D activities.
As a result of the consultation, a further exemption has been included in order to exclude genuine businesses, through a two-stage test:
- A claim will be uncapped if the company's employees are creating, preparing to create or actively managing intellectual property, and
- the company's expenditure on work subcontracted to, or EPWs provided by, a related party is less than 15% of the total R&D expenditure of the company.
Due to take effect in April 2020, the introduction of the cap has been delayed until 1 April 2021.
Useful guides on this topic
R&D Tax Reliefs: At a glance
What's Research and Development (R&D) relief? How to claim R&D relief? Small company R&D relief explained? Can individuals claim R&D relief?
R&D: SME Tax Credit Scheme subscriber guide
What Research & Development (R&D) schemes can be claimed by R&D? How to make an R&D claim?
R&D Zone
Worked examples and case studies covering SME and large company R&D claims.
External Links
Preventing abuse of the R&D tax reliefs for SMEs: Second consultation
Preventing abuse of the R&D tax reliefs for SMEs: Policy paper