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In March 2020, HMRC published 'Preventing abuse of the R&D tax relief for SMEs: Second consultation'. It looked at the design of the PAYE cap being introduced to prevent abuse of the R&D payable tax credit. The new cap will apply from April 2021.

HMRC's initial 2019 consultation considered how the proposed PAYE cap would work in practice, whilst preventing fraudulent tax relief claims. The second consultation then sought feedback on how the cap would work regarding related party costs and Externally Provided Workers (EPWs), as well as ways to ensure that genuine businesses were not disadvantaged by the new rules.

Proposals from the first consultation have been confirmed in a new policy paper:

As a result of the consultation, a further exemption has been included in order to exclude genuine businesses, through a two-stage test:

Due to take effect in April 2020, the introduction of the cap has been delayed until 1 April 2021.

Useful guides on this topic

R&D Tax Reliefs: At a glance
What's Research and Development (R&D) relief? How to claim R&D relief? Small company R&D relief explained? Can individuals claim R&D relief?

R&D: SME Tax Credit Scheme subscriber guide
What Research & Development (R&D) schemes can be claimed by R&D? How to make an R&D claim?

R&D Zone
Worked examples and case studies covering SME and large company R&D claims.

External Links

Preventing abuse of the R&D tax reliefs for SMEs: Second consultation

Preventing abuse of the R&D tax reliefs for SMEs: Policy paper