My VIP Tax Team question of the week: R&D tax credit cap
I have a limited company client that has been trading for a few years. The company has undertaken some research and development (R&D) and is making a claim for the SME R&D relief in the year ended 30 June 2022. It has a large trading loss in the year that has been enhanced by the enhanced 130% deduction for qualifying R&D.

They have chosen to surrender some of the losses in return for the R&D tax credit. My colleague mentioned that the credit is going to be restricted due to the size of the company’s PAYE bill. Is this a new restriction and how does it work?

References to legislation are to CTA 2009 unless otherwise specified.

The R&D tax credit

Loss making SMEs may make a claim to surrender certain losses for a payable R&D tax credit (s1054). The amount of the tax credit is determined by applying the relevant percentage, currently 14.5%, to the company’s “chapter 2 surrenderable loss” (s1058) which is defined as follows for those companies that have claimed the additional deduction under section 1044:

(a) so much of the trading loss as is unrelieved, or

(b) if less, 230% of the qualifying Chapter 2 expenditure in respect of which the relief was obtained

The unrelieved trading losses are those after taking in to account any current year offset that is actually or could have been claimed, any other loss relief actually claimed (including carry back of the loss to earlier years) and any loss actually surrendered under group or consortium relief (s1056).

The credit cap with reference to PAYE and NIC

In an attempt to combat abusive and fraudulent claims under the R&D scheme, the government introduced a cap to the amount of the R&D tax credit that can be claimed with reference to the PAYE and NIC liabilities paid in the accounting period. This cap should be considered for accounting periods beginning on or after 1 April 2021.

Section 1058 was amended so that the amount of R&D tax credit that a company is entitled to is the lower of:

  • 14.5% of the amount of chapter 2 surrenderable loss for the amount and
  • £20,000 plus three times the company’s relevant expenditure on workers for payments periods ending in the accounting period

Where the accounting period is less than 12 months, the £20,000 is proportionately reduced.

A payment period is the monthly payment period for PAYE and NIC ending on the 5th of each month (s1141).

Relevant expenditure on workers includes the company’s total PAYE and NIC liabilities, not just those relating to R&D, plus certain PAYE and NIC liabilities of any connected persons that have done subcontracted R&D for, or provided workers to, the company. (s1058A and s1058B CTA 2009)

The exceptions

Section 1058D sets out circumstances for when the cap does not apply where two conditions are both met by the company.

Condition A looks at what the company is engaged in and will be met if the company is:

  • taking, or preparing to take, steps in order that relevant intellectual property will be created by it,
  • creating relevant intellectual property, or
  • performing a significant amount of management activity in relation to relevant intellectual property it holds.

Condition B is where the company has qualifying R&D expenditure on externally provided workers from a connected company or R&D contracted out to a connected company, the amount makes up less than 15% of the company’s total qualifying R&D expenditure.

You can find HMRC guidance on the R&D tax credit cap at CIRD90600. Please note, the above is a brief overview of a complex area of tax and formal advice should always be sought so that it can be tailored to your client’s circumstances.


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Before joining the team, Vivienne had worked for small boutique tax firms which gave her exposure to a wide variety of tax. She dealt with tax issues mostly for owner-managed businesses and high net worth individuals. Vivienne is a member of the Association of Tax Technicians and is currently in the middle of studying to become a Chartered Tax Advisor.

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