The rules on R & D tax relief for subcontractor costs will change from 01 April 2021. Disappointingly, the PAYE cap abolished in the 2015 Finance Act will reappear, restricting RD tax credit payments for small companies to the amount of PAYE contributions paid over to HMRC in the same accounting period. Important exemptions are also introduced and writes Maria Kitt, it is very important that companies with large subcontractor costs are aware of these.
The move comes as a response to several direct fraud cases where companies have openly abused the RD scheme by making frankly bogus payments to companies connected to the payee, nominally ‘subcontracting’ RD work. Two of these cases have made the press, but several more and several twists on this theme have not. Therefore, a blanket protection measure for the scheme was identified and after lengthy consultation with accountants and advisers, the rules have been honed to protect genuine RD companies and the exchequer alike.
From 01 April 2021, RD companies should be able to point to the creation or exploitation of intellectual property (not a defined term) as a result of their investment in RD where subcontractors payments exceed normal employee payments to prevent any ‘cap’ on the relief.
The full rules are summarised below and as ever please email if you require any assistance or advice, firstname.lastname@example.org
Subcontractor PAYE Cap, 01 April 2021
The detailed legislation that has now been unveiled shows that the government has taken steps to address the concerns that a number of small businesses that undertake valuable and genuine R&D activities could have been inadvertently penalised by the new legislation. The published legislation now includes a number of tests and exemptions for companies where, if satisfied, they will not be caught by the new rules.
New exemptions to the PAYE cap
The new rules will include a £20,000 claim threshold, below this amount the cap will not apply – so smaller claimants will be unaffected by the new rules. While this will come as a blow for some larger claimants, it means that the new rules are now only targeting companies that subcontract large amounts of their R&D to third parties. Large companies claiming RDEC are unaffected but continue to align RD relief with the PAYE contributions as before.
An R&D claim, of any size, will not be capped if the claimant company meets two tests:
- That the company’s employees are creating, preparing to create or actively managing intellectual property.
- That expenditure on work subcontracted to a related party, or externally provided workers provided by a related party, is less than 15% of the claimants overall R&D expenditure.
These new conditions are similar to requirements already present in the legislation for the UK patent box regime. However, in this instance the test is focussed on the management activities around the exploitation and development of intellectual property rather than its ownership. These rules have been designed to exempt companies with low PAYE and NIC, but which are nevertheless themselves engaged in genuine, substantial R&D.
Another helpful addition to the new rules is that 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 be subject to the 300% multiplier.
For group companies with single source payrolls, detailed guidance will continue to operate to align the PAYE cap to the relevant RD claimant company.