This article talks about the cap on the amount a company can claim as payable R&D tax credits under the SME scheme after 1 April 2021.
The R&D tax relief scheme is a tax incentive designed to encourage greater spending on R&D and investment in innovation. Under the SME scheme, companies can claim back up to 33.35% of the money spent on research and development. However, for accounting periods starting on or after 1 April 2021, the amount of payable tax credits a SME can receive could be limited.
What is the cap on payable tax credits under the SME scheme?
The SME cap limits the amount of payable R&D tax credits (cashback). An SME can claim up to £20,000 plus 3 times its total National Insurance and PAYE liabilities for that accounting period.
Who is affected by the SME cap?
-
Companies making R&D claims for accounting periods starting on or after 1 April 2021
-
Companies claiming payable R&D tax credits for an amount above £20,000 under the SME scheme
-
SMEs not managing their own IP
-
SMEs incurring costs on connected subcontractors
Who is exempt from the SME cap?
1. The company's employees are creating, preparing to create or managing Intellectual Property (IP)
According to the definition given by the UK government, you own IP if you have created it (and it meets the requirements for copyright, patent or design), you bought it from the previous owner or you have a brand that could be a trademark.
For the purpose of the SME cap, the Finance Act 2021 has expanded the definition of IP to include -
(a) any patent, trade mark, registered design, copyright, design right or plant breeder’s right,
(b) any rights under the law of a country or territory outside the United Kingdom which correspond or are similar to those falling within (a), or
(c) any information or technique not protected by a right listed above but having industrial, commercial or other economic value.
Further, for the purposes of the SME cap, the company is also considered to be creating the IP if the IP was created in a manner such that the right to exploit the IP rests with the company.
Condition 1 for the SME cap is met if your company (or its employees) is creating the IP and your company owns it, or it is planning to create the IP. However, this condition can also be met if the company is taking, or preparing to take, steps in order that the IP will be created by it or if the company is performing significant management activity in relation to the IP.
Management activity in relation to the IP refers to formulating plans and making decisions in relation to the development or exploitation of the intellectual property.
AND
2. No more than 15% of the company's qualifying R&D expenditure for the accounting period is on connected subcontractors or EPWs.
Subcontractors can be connected if there is common ownership or control. If you are not sure if this applies to your subcontractors then please contact us and we’ll be happy to discuss.
How is the SME cap calculated?
For each accounting period, the SME cap will be £20,000 (or a proportion of £20,000 for accounting periods shorter than 1 year) plus 3 times the total National Insurance Contributions (made up of total National Insurance and PAYE liabilities for that accounting period).
Total Employer's National Insurance Contributions Liability
This is the total Employer's National Insurance paid by your company on the earnings of your employees. Please enter this figure of each accounting period affected by the SME cap separately. For instance, if your accounting period affected by the claim started on 1 April 2021 and ended on 30 April 2021, please only enter the total Employers NIC liability for 1 April 2021 - 30 April 2021 only.
You can find this figure on your monthly payroll reports.
Total Employee's National Insurance Contributions Liability
This is the total National Insurance paid by your employees on their earnings. Please enter this figure of each accounting period affected by the SME cap separately. For instance, if your accounting period affected by the claim started on 1 April 2021 and ended on 30 April 2021, please only enter the total Employees NIC liability for 1 April 2021 - 30 April 2021 only.
You can find this figure from your monthly payroll reports.
Total PAYE Liability
This is the total Pay As You Earn tax (income tax) paid by your employees on their earnings. Please enter this figure of each accounting period affected by the SME cap separately. For instance, if your accounting period affected by the claim started on 1 April 2021 and ended on 30 April 2021, please only enter the PAYE for 1 April 2021 - 30 April 2021 only.
You can find this figure on your monthly payroll reports.