New anti-avoidance R&D tax relief measures come into force

This post is part of our Entrepreneurial team’s regular series of blogs.

A new PAYE/NIC cap on SME tax credits is coming into force for accounting periods beginning on or after 1st April 2021. The cap is designed to target fraud and abuse of SME tax relief schemes.

This measure has been a long time coming, having gone through a number of consultations. Whilst the cap is not designed to affect genuine and authentic SME tax relief claims, anyone making a claim should be aware of its impact – a business may inadvertently fall foul of the new rules, jeopardising its access to tax credits.

The measure limits the amount of payable Research & Development (R&D) tax credit which an SME can claim to £20,000 plus 300% of its total PAYE and NIC liability for the period. There is an exemption from the cap if:

  • its employees are creating, preparing to create or managing Intellectual Property (IP) and
  • it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

For these purposes, IP includes: any patent, trademark, registered design, copyright, design right, performer’s right or plant breeder’s right. As announced at the Budget 2021, the definition of IP has, happily, also been widened to include ‘know-how’ and ‘trade secrets’.

There is, however, still a risk that companies may inadvertently be affected by the cap – for example where the company has low payroll expenditure compared to other eligible costs and doesn’t meet the above exemption.

In most instances, particularly where the company is an early start-up, the tax credit can provide a vital lifeline. The PAYE/NIC cap adds another layer of complexity to the tax claim processes which – whilst not impacting the majority of claims – requires companies to plan now rather than wait to the end of their accounting period, to ensure that there is no unintentional impact to this critical source of funding.

If you have any questions, contact me at david.philp@chiene.co.uk or 131 558 5800.