Why HMRC elected to bring back PAYE/NIC cap for R&D tax credits and what does this mean for your claim?
As things stand, R&D tax credits are available to loss making companies with relevant qualifying expenditure at a rate of 14.5%.
This means that small and medium sized businesses making a taxable loss are currently able to benefit from a tax repayment of up to 19p for every £1 of qualifying R&D expenditure irregardless of if they have paid any tax historically. This can be a meaningful boost to such companies and is known as the R&D tax credit.
Previously, HMRC had a cap on the R&D tax credit cash back option for loss making companies. This cap was eliminated in 2012. From April 2020 the cap returns meaning there is a limit on the amount of tax credit a company can recover.
Why is the cap back?
As there has been no cap on payable R&D tax credits since 2012, international companies could incorporate a company in the UK and run their foreign R&D expenses through the UK company and collect refundable R&D tax credits. This was an abuse of the program. These types of companies had no operations in the UK and were making no contribution to the UK economy.
As a result of these fraudulent claim submissions, HMRC prevented paying over £300 million in R&D tax credits, which works out to approximately 9% of the total £3.5 billion issued to companies overall.
When does the cap come into effect?
The cap comes into effect for all companies with accounting periods that commence on or after April 1st, 2020. Claims for periods before this date do not suffer from the impact of this cap.
In practice this means that companies will no longer receive a payable R&D tax credit if the company has no PAYE. For those companies who are in a loss-making position, payable R&D tax credits will be restricted to three times their PAYE and National Insurance bill.
This cap will have a substantial effect on those companies who are loss making and have relatively small PAYE and National Insurance bills when compared to their qualifying R&D spend.
As a result, many legitimate UK start-ups, who are paying staff on contract or director shareholders who are conducting R&D activities themselves but are unable to take a salary may be adversely caught by these rules.
To find out how best to plan for these important points, please contact our R&D tax team for further details.