The government has announced that it will reintroduce the PAYE and NIC cap on the amount of payable tax credit that a qualifying loss-making business can receive in any one accounting period. This is to help combat and prevent fraudulent claims under the R&D SME scheme.

The cap will be set at three times the company’s total PAYE and both employee and employer NICs liability for the year. It will come into effect for accounting periods which commence on or after 1 April 2020.  

At the end of March the government opened a consultation, which set out a number of questions around possible measures to ensure the impact of the cap on genuine companies is kept to a minimum before it is implemented. The consultation is open until 24 May 2019.

Accompanying measures to try to ensure the cap is effective

The government has acknowledged that the introduction of this cap is likely to give rise to administrative burdens for businesses. To try to tackle this the government has suggested three possible measures alongside the cap regime.

  • The cap to payable tax credit claims will be only be applied above a certain threshold so that the smallest businesses remain unaffected. However, to prevent abuse from groups making small multiple claims at or below the threshold, the government intend to allow only one company below the threshold payable tax credit to make one claim per year for any group of companies under common control.
  • If a claim is greater than the threshold level of the payable tax credit, the government will allow the use of some of the PAYE and NICs liabilities of workers engaged in an R&D project subcontracted by the company to its group or connected party.
  • Companies affected by the cap will be able to access the rest of their payable tax credit once they have built up enough PAYE and NICs liabilities in a future year. The option to surrender the losses in exchange for a payable tax credit will be time restricted to 2 years if there is sufficient PAYE and NICs liability after any claim which relates to the current year.

Within the consultation the government has asked 8 questions about the above measures in order to get responses and input from businesses and their representatives currently claiming or planning to claim the payable tax credit.

Responding to the consultation

If you are likely to be impacted by this, we strongly encourage you to respond directly to the consultation as feedback of this nature is the most persuasive.  The measures set out above are unlikely to mitigate sufficiently the potential impact for many early stage companies operating in Life Sciences.

In your response you do not necessarily need to address all the consultation questions although questions 7 and 8 are of particular importance.

Potential additional remedies to those suggested by the government that might be considered are:

  1. Disapplying the cap for expenditure incurred on drug or device or device development
  2. A gateway such that the cap does not apply to circumstances that can be shown to be genuinely commercial in nature and non-abusive

In order to share your views on this you can respond to the consultation on consultation2019.rdtaxrelief@hmrc.gov.uk