SME R&D Tax Credit Changes – Introduction of a PAYE/NIC Cap

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Here we cover a change announced in the 2018 Budget Statement regarding an R&D Tax Credit PAYE cap that will be introduced for the SME R&D Tax Credit incentive.

In a nutshell, the UK Government is introducing a cap on the total amount that can be paid out to an SME as an R&D tax credit.

The cap will be 300% of the total PAYE & NIC incurred by a company in the relevant accounting period.

Although it is disappointing to see the introduction of a PAYE cap, the new rules are intended to prevent perceived abuse of the R&D tax credit incentive. We just hope that this change will not deter or prevent otherwise eligible companies from benefiting.

This change will be introduced for accounting periods beginning on or after 1 April 2020.

In this short video overview, we consider how and in what situations these new rules might impact companies, plus we provide a summary of these new rules.

Topics that we cover include:

  • This change could negatively impact startups. Particularly, companies in the tech and software development field. As these companies might utilise subcontractors, rather than employees. Especially during the early stages.
  • Also, companies that are investing their R&D funds primarily into prototype costs rather than employee costs. The latter would generate PAYE/NIC, while the former would not.
  • Finally, there is the recurring issue of shareholder/directors taking their remuneration primarily in the form of dividends. If there are insufficient employees to generate the level of PAYE/NIC that the company needs, then this could cause a problem.

We cover these issues in a little more detail in the video. So companies might wish to start taking steps now to consider how they might be able to mitigate these restrictions. As there is still time before the new rules kick in for accounting periods beginning after 1 April 2020.