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  • Product: Digita Corporation Tax

SME R&D tax credit cap in Corporation Tax

About the SME R&D tax credit cap

For accounting periods that start on or after 1 April 2021, a cap may now apply to SME R&D tax credits. Under the cap, small or medium-sized enterprises (SMEs) can claim R&D tax credits up to £20,000 plus 300% of their PAYE and NIC liability. 
note
A company is exempt from the cap if both of the following apply:
  • The company's employees are creating, preparing to create, or managing Intellectual Property (IP).
  • The company doesn't spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to connected parties, or on the provision of externally provided workers (EPWs) by connected persons.

Application of cap in Corporation Tax

From version 22.4, there are more boxes in the
Research and Development
 tab when you deal with an accounting period starting on or after 1 April 2021.
  1. Enter the Qualifying R&D expenditure and mark the
    Claim R&D tax credit
     checkbox as normal.
  2. In the Tax Credit details section, enter the
    Relevant expenditure on workers
    .
    note
    Corporation Tax will then calculate the cap.
  3. If Corporation Tax doesn't calculate the capped credit you expect, replace it with an
    A
     to refresh the calculation.
tip
  • The cap is prorated if dealing with a short period. For example, it would be £10,000 plus (PAYE liability for the period x 300%) for a 6-month period.
  • We included automatic writebacks to the CT600L in Corporation Tax from version 22.4. Make sure that you're running the latest version Corporation Tax
In this example, a loss-making company with a year end of 31 December, 2022 has a trade loss of £10,000 and qualifying R&D expenditure of £200,000, which when enhanced, gives total R&D costs of £260,000.
The amount available to surrender is £260,000 and the tax credit without the cap would be £39,150. The company has a PAYE and NIC liability of £3,000 for the period. The cap therefore reduces the tax credit that can be claimed to: £20,000 + (£3,000 PAYE liability x 300%) = £29,000.
To calculate the loss available to surrender for this amount, you can divide the result by 14.5%, which in this example is £200,000.
Screenshot from Corporation Tax. Shows the Other Claims for Chargeable Period window with the Research and Development tab open. In the Company Details and Claims section, the Claim R&D tax credit checkbox is marked. In the SME Company R&D Relief section, there's a table with 4 columns: Details, Per Accounts, Enhancement and Total Deduction. This table has data for 2 rows: Qualifying R&D expenditure and Relief claimed. The Total enhancement is a calculated box under the this table. The Tax Credit section has a table with 2 columns: Details and Amount. Two rows are highlighted: Relevant expenses on workers at 3,000; and Capped credit (max £20,000 +300% of expenditure on workers) at 29,000.00.