Research and development tax relief - Reintroduction of PAYE/NIC cap for claims by small and medium sized enterprises

The measure

Currently non tax-paying small and medium sized enterprises (SMEs) are able to claim an unrestricted cash credit under the research and development (R&D) SME scheme by surrendering their tax losses back to HMRC. It is now proposed that this cash credit will be capped at three times the amount paid to HMRC in respect of the PAYE and NICs liabilities for the accounting period in which the qualifying R&D expense is deductible in calculating the taxable profit.  

Who will be affected?

Reinstating a PAYE/NICs cap means that only SME companies that employ staff will be able to claim R&D cash credits. For those companies where a substantial proportion of the R&D expenditure is incurred as third party costs or payments for materials and software, the cash benefit of the SME regime will only be available up to the value of the cap. Any losses that the company cannot surrender for the cash credit may be carried forward to offset against future taxable profits. 

When will the measure come into effect?

The government will consult on this change, but have stated that it will have effect for accounting periods beginning on or after 1 April 2020. 

Our view

Whilst we acknowledge the need for HMRC to ensure that abusive or fraudulent R&D cash credit claims are not made, this restriction may adversely impact on companies that use significant third party staff and/or subcontracted resources to support their R&D activities.  

We do however welcome the cap being set at three times the PAYE/NIC lability, which is more generous than the previous cap that was abolished in 2012.