What is the Merged R&D Scheme’s PAYE and NIC Cap?

The PAYE and NIC cap was introduced to prevent fraudulent R&D claims by companies not engaged in UK R&D activities. The aim is to ensure R&D tax relief benefits businesses genuinely conducting R&D in the UK.

Historically, PAYE and NIC caps have existed within the SME and RDEC scheme to prevent fraudulent claims from companies that do not invest in R&D. By maintaining these caps, the scheme supports eligible companies actively conducting genuine R&D in the UK, preserving the integrity of the tax relief.

The cap stops companies with little or no employment in the UK from exploiting the scheme by channelling funds through the UK to access R&D tax relief. Essentially, it keeps the focus on supporting genuine innovation within the UK. By maintaining this cap, the scheme ensures that only eligible companies, truly involved in R&D, can benefit from the relief, preserving its integrity and purpose.

The cap equals £20,000 plus 300% of the company’s relevant PAYE and NIC liabilities. This generous structure is designed to support genuine R&D activities without allowing for exploitation.

In the merged scheme, the cap limits the amount of credit payable within the accounting period in which it’s claimed. If your claim exceeds this cap, the surplus is carried forward and treated as an R&D expenditure credit in future periods. This means you can offset it against future corporation tax liabilities.

By implementing these measures, the PAYE cap aims to maintain the integrity of the R&D tax relief scheme, ensuring that it benefits those truly driving innovation in the UK.

You could be exempt from the cap if you meet these two conditions:

1. Creation or management of Intellectual Property (IP):
   • You must be preparing to create, actively creating, or managing IP.
   • If you undertake R&D, you’ll generally meet this condition.
2. Expenditure limits on EPWs and Subcontractors:
   • No more than 15% of total R&D expenditure can be spent on connected EPWs or connected subcontractors.

Both conditions should be satisfied for a company to qualify for the exemption.

Merged R&D Scheme

• The cap limits the credit payable during the claim period.
• Excess credit can be carried forward, becoming an R&D expenditure credit in future periods.

ERIS (Enhanced R&D Intensive Support) Scheme

• The cap does not allow excess amounts to be carried forward.
• Claims above the PAYE cap are deemed invalid.

The PAYE and NIC Cap are essential for ensuring that R&D tax relief is allocated properly and within the UK. Grasping the nuances of this cap and its exemptions is crucial for compliance with the scheme.

If you believe you might be impacted by the PAYE cap but are uncertain, please get in touch with one of our experts, who will be happy to assist you.