Payable tax credit – PAYE & NIC cap to be re-introduced – Budget 2018

John Moore, October 29th, 2018


R&D Tax relief payable tax credits to be capped in the future – Budget 2018 announcement


For SMEs the relief has become much more generous in the last few years, with the total tax relief increasing to 230% from 1 April 2015. For companies not paying corporation tax there is the opportunity to claim cash back from HMRC. This can be a vital source of finance for technology SMEs. The PAYE/NIC cap restrictions previously applying to this valuable cash source were removed from 1 April 2012, making this relief even more beneficial giving a potential benefit for loss making companies to be up to 33.35p for every £1 of eligible R&D spend. In the past the removal of the original PAYE/NIC cap was welcomed as it restricted the repayment available to the total of the amount of PAYE and NIC paid by the company. The cap disadvantaged SMEs that had few staff, instead relying on the input of the owner/directors or the use of subcontractor input to the development process. 

The change

In his 2018 Budget on 29 October 2018 the Chancellor announced a forthcoming restriction to limit the amount of payable tax credit that can be claimed by a company under the R&D SME tax relief. The announcement states that the limit will be set at three times the company’s total PAYE and National Insurance contribution (NICs) payment for the period. The change will have effect for accounting periods beginning on or after 1 April 2020. Any loss that a company cannot surrender for a payable credit can be carried forward and used against future profits. The Government have said that they will consult on this change.

The announced change has been introduced in order to prevent abuse of the R&D tax Relief for SMEs by the use of artificial corporate structures using companies to claim the payable credit, even though they have no legitimate R&D activity.  Another stated concern is the use of structures set up to claim the payable tax credit despite having little or no employment or activity in the UK. An HM Treasury Policy paper released on Budget day states that HMRC has identified and prevented £300m of fraud and that this change will help to address similar abuses in the future. 

Our view

Reduction and elimination of such abuses of the regime and ensuring a real UK presence is to be commended. However, in our view the mechanics of this solution are a retrograde step that may potentially disadvantage precisely those genuine companies who, for reasons of cost control and resource constraints, are unable to employ a large number of staff in the company carrying out the development process. This will tend to affect start up companies with a small staff rather than the larger, more established companies, that may have a larger staff incorporating the R&D staff as well. Typically such start ups will tend to use subcontractors or externally provided workers on whom they will not have to account for PAYE or National Insurance. Companies whose claim contains a large amount of consumables in the R&D process may also be adversely affected if the costs of these are high in proportion to employee costs. 

Whilst the announcement indicates that the PAYE and NIC cap will be at three times the company’s total contributions, which is more generous than the previous incarnation of the cap, we still think that this will have the potential to reduce the amount of R&D that genuine SMEs will be funded for under the SME scheme. HMRC have said that close to 95% of companies currently claiming the payable credit will be unaffected, however this will introduce a measure of uncertainty to SMEs when planning how R&D projects will be resourced. The ability to carry forward the additional losses generated by the relief to offset against future profits will not assist with vital cashflow at the development stage.

If you would like to know more about this, or discuss it’s application to your company, then please contact John Moore on 0207 292 8850 or at


This briefing is prepared by Kingly Brookes LLP, a limited liability partnership. For further information on any of the material contained in or referred to in the briefing, please contact us. This briefing note is intended to keep our readers up to date with the developments in this area, but it is a general guide only and is not intended to be a comprehensive statement of the law and practice in this area. No liability is accepted for the opinions it contains or for any errors or omissions.