Cap on R&D tax credits

From 1 April 2020 the cash refund for payable R&D tax credits for small and medium size businesses (SMEs) will be limited based on the amount of payroll taxes paid by the company.

SMEs can claim upto £20,000 plus 300% of its total PAYE and NIC liability for the period.

However, a company is exempt from the cap if:

  • 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

CTA 2009 s1058D sets out the key definitions:

“IP” is:

(a) any patent, trade mark, registered design, copyright, design right, performer’s right or plant breeder’s right, or

(b) any rights under the law of a country or territory outside the United Kingdom which correspond or are similar to those falling within paragraph (a);

“management activity”, in relation to intellectual property, means formulating plans and making decisions in relation to the development or exploitation of the intellectual property


Where an accounting period straddles 1 April 2021 the periods before and after this date will need to be separated or apportioned so that the new rules can be applied to R&D after this date.

By Mohammed Haque

Mohammed is a chartered accountant (ICAEW) with many years of experience in dealing with complex audit, accounting and tax matters.

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