Changes to the PAYE/NIC Cap

When the R&D tax credit scheme was introduced in 2000, HMRC operated a PAYE/NIC cap for the first 12 years. Following a substantial rise in ‘abusive’ claims HMRC have reintroduced the cap linking the payable tax credit a business can receive to its PAYE/NIC bill. Specifically the cap will address concerns over artificial structures with little or no employment or R&D activity set up mainly for the purpose of accessing the payable tax credit.

What is the PAYE/NIC Cap?

The new PAYE/NIC cap is calculated as a flat rate of £20,000 plus

  • 300% of the total PAYE/NIC payments made in one year (not just spend of R&D related staff)
  • 300% of any externally provided workers (EPWs) PAYE/NIC costs from a connected party
  • 300% of any relevant PAYE/NIC costs incurred by a connected party where the work has been subcontracted out

When is the Cap being introduced?

The cap will affect accounting periods beginning on or after the 1st April 2021.

Who will be affected by the Cap?

The following businesses could be affected by the cap:

  • Loss-making businesses where losses will be surrendered for a cash refund
  • Businesses with very little or no payroll expenditure
  • Businesses who have outsourced lots of work or incurred high prototype costs

Loss making companies will be capped on their payable tax credit in that year. Any payable credit over the cap can be carried forward to use in later years. 

Exemptions from the Cap

A company is exempt from the cap if it meets two tests :

  • If a company is creating, preparing to create, or actively managing intellectual property (IP)
    • IP relates to a patent, trademark, or copyright that is being developed. To qualify, the activities associated with the IP must have been undertaken by company employees, not by subcontractors or EPWs, and the company must hold the right to exploit the IP.


  • If a company’s expenditure on work subcontracted to, or EPWs provided by, a connected party is less than 15% of its overall R&D expenditure

What to do if your Company is affected by the Cap

If your business meets any of the above requirements and you would like to receive further information regarding how the PAYE/NIC cap might affect your R&D claim, please do not hesitate to contact a member of our finance team. They can help calculate how the cap may affect your subsequent R&D claim.

COVID-19 and Your Claim

Due to the onset of the pandemic, new COVID-19 scheme effects have been added to the existing rules of the R&D scheme. Several forms of state aid have been introduced to assist businesses effected by the pandemic, and the type of state aid received can affect your subsequent R&D claim.

Let us start with state aid. State aid is defined as money invested by the Government into domestic businesses and can take the form of many state resources including monetary grants, which do not need to be repaid, or loans which must be paid back. These loans have more favourable terms than those available commercially. Additionally, tax breaks can be offered to greatly reduce a taxpayer’s liability. These come in three forms, either a tax deduction, a tax credit, or a tax exemption, and reduce the amount of gross income that is subject to taxes. State-subsidised aid is distributed by public authorities on a selective basis to organisations that could potentially disrupt competition and trade within the European Union. All state aid provided by the EU is ruled as either notifiable, non-notifiable, or De Minimis.

For R&D purposes, an R&D project cannot receive more than one form of notifiable state aid. As the SME R&D scheme is considered a form of state aid, if a company has received a different form of notifiable state aid and subsequently spent it on their research and development project, they will be unable to utilise the SME scheme. However, if the alternative form of state aid has been separated from the R&D project, the company can still utilise the SME scheme. Other notifiable state aid schemes include the Coronavirus Business Interruption Loan Scheme, Coronavirus Large Business Loan Scheme, Bounce Back Loans, and the Retail, Hospitality and Leisure Grant Fund.

A business can be in receipt of De Minimis state aid and still qualify for the SME scheme. However, any costs from the De Minimis state aid spent on R&D will have to be deducted. For example, the Coronavirus Job Retention Scheme, otherwise referred to as Furlough, is treated as De Minimis state aid. Consequently, any costs subsidised under the Furlough scheme would not be eligible in the claim. As employees were instructed not to work while receiving Furlough, any costs associated with the employee for the period they were furloughed would also have to be removed from the claim. Additionally, the Small Business Grant is considered De Minimis state aid, and any money received and subsequently spent on R&D will be excluded under the SME R&D scheme.

Additionally, a company may receive aid from the Future Fund. As this is not considered either notifiable or De Minimis state aid, any money received from this fund and spent on R&D will have no impact on a company’s eligibility for the SME R&D scheme.

In 2021, a new form of notifiable state aid was introduced called the Recovery Loan Scheme. Although notifiable state aid cannot normally be claimed for under the SME scheme, this scheme was introduced post-Brexit and therefore does not fall in the same bracket as other forms of notifiable state aid. As such, it does not affect a business’s ability to claim on the SME R&D scheme. However, it is important to note that if a company’s R&D activity is subject to the Northern Ireland Protocol, it would subsequently fall under the regular EU state aid rules and would impact a business’s ability to claim under the SME scheme.

If your company has received any form of state aid and you are concerned that this could impact your ability to claim, please do not hesitate to contact us. Our team can help identify all qualifying expenditure and compile this into a report format recognised and accepted by HMRC.