15 Apr 2021

R&D tax credits – how the PAYE & NIC cap affects claims

When the R&D tax credit system was first introduced for SMEs it included a PAYE / NIC liability cap – this meant that the repayable tax credit could not exceed the amount of PAYE / NIC paid by the company for that relevant accounting period. The cap was removed in 2012, but more recently HMRC has become concerned that the absence of the cap resulted in companies not intended to benefit from R&D credits receiving significant cash payments.

The government announced an intention to reintroduce a cap in 2018, consulted extensively in 2019 and 2020, and after considering all the views put forward, it has now confirmed that the design of the PAYE cap will include the following features to minimise the impact on genuine businesses:

  • A company making a small claim for payable credit below £20,000 will not be affected by the cap
  • The cap will be increased from the £20,000 by adding the claimant company’s entire PAYE / NIC liability for the period and applying a multiplier of 300%
  • A company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap and these will also be subject to the 300% multiplier
  • A company’s claim, of any size, will be uncapped if it meets two tests. These tests require that a company’s employees are creating, preparing to create or actively managing intellectual property (IP) and that its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure

The consultation on the cap highlighted that the abusive structures which concerned HMRC involved expenditure incurred on related party externally provided workers (EPW) and subcontractors (likely from overseas). Where the company can demonstrate that such costs are not included in the claim or are only a small part, the intention is that the claim remains uncapped. However, it will be interesting to see how group and related party claim structures are affected – hopefully whilst the IP and 15% test might not be met, the PAYE / NIC liability and 300% multiplier will be enough to ensure all genuine claims are unrestricted.

Companies will need to consider whether the cap changes their entitlement to payable R&D credits to ensure that there are no surprises or adverse impacts on cashflow when a claim is eventually prepared.

The changes to R&D SME tax relief will be legislated in Finance Bill 2021 and have effect for accounting periods beginning on or after 1 April 2021.

Links to the legislation and the government consultation can be found below.

https://www.gov.uk/government/publications/preventing-abuse-of-research-and-development-tax-relief-for-small-and-medium-sized-enterprises/preventing-abuse-of-research-and-development-tax-relief-for-small-and-medium-sized-enterprises

Get in touch

Related insights

Entrepreneurship- changes to tax rules in the 2025 budget 

27 November 2025

Read
A blur of shoppers on a busy high street on a winters day.

VAT, customs duties and indirect taxes changes in the Autumn Budget 2025

27 November 2025

Read
Two men are working in a manufacturing workshop

Budget 2025: what are the main changes to capital allowances?

27 November 2025

Read
A view of Big Ben and the Houses of Parliament from across the river Thames.

What the Budget means for unincorporated businesses

27 November 2025

Read
A pen rests on a printed balance sheet

Budget tax changes affecting property, dividends and savings income

26 November 2025

Read

How do Autumn Budget 2025 announcements impact business owners’ decisions on profit extraction?

26 November 2025

Read
A business woman talks on her mobile phone whilst working at her computer at home.

Autumn Budget Overview 2025

26 November 2025

Read
A team of professionals in a modern office having a meeting around a conference table.

Salary sacrifice and employment tax changes: What employers need to know

26 November 2025

Read

Supporting volunteers: HMRC compliant expenses and recognition tips for charities

19 November 2025

Read
Two businessmen shaking hands on a transaction

Private equity investment and tax compliance

14 November 2025

Read

Unlocking the Power of Data in Financial Due Diligence

13 November 2025

Read
An aerial view of The Houses of Parliament in London.

Autumn Budget 2025 predictions

12 November 2025

Read