Preventing abuse of the R&D tax relief for SMEs – Draft legislation published

John Moore, November 13th, 2020


At Budget 2018 the government announced that a cap set at 300% of a company’s PAYE/NIC liability would be applied to SME scheme payable credit claims.  By way of background, HMRC have identified and prevented fraudulent attempts to claim the SME payable credit totalling over £300m where companies were set up to claim the payable tax credit even though they had no R&D activity or where structures had been deliberately set up to claim the payable tax credit despite there being little employment or activity in the UK.

Since that Budget announcement there have been two published consultations and after considering all the views put forward, the government has now published draft legislation for the R&D SME scheme PAYE/ NIC cap.

The potential cap explained

This measure limits the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.

A company’s claim, of any size, will be uncapped if it meets two tests:

  • its employees are creating, preparing to create or managing Intellectual Property (IP) and
  • it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

The government is now confirming that the design of the PAYE cap will include the following features to minimise the impact on genuine businesses:

  • A company making a small claim for payable credit below £20,000 will not be affected by the cap.
  • 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.

Operative date

The measure will have effect for accounting periods beginning on or after 1 April 2021 and where the company’s accounting period straddles this date the cap will potentially apply to that part falling on or after 1 April 2021.

What next?

The government is inviting comments on the draft legislation by 7 January and the changes to R&D SME tax relief will then be legislated in Finance Bill 2021.

If you would like to contact us to discuss the potential application of the cap to your claim process, or would like us to make representations as part of the consultation then please contact John Moore of Kingly Brookes on 0207 292 8850 or

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.