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Cap by reference to PAYE and NIC liabilities CTA09/S1112B听

The amount of the PAYE cap for claims under both the merged scheme RDEC (鈥渘ew RDEC鈥�) and enhanced R&D intensive support (ERIS) is 拢20,000 plus 300% of the company鈥檚 relevant PAYE and National Insurance Contributions (NIC) liabilities (CTA09/S1112B(2)) for payment periods within the accounting period. If the accounting period is of less than 12 months duration, the amount of 拢20,000 is proportionately reduced (CTA09/S1112B(3)).听

Under new RDEC, the PAYE cap (where applying) limits the amount of payable credit the company can receive in the accounting period for which it claims by applying a restriction at step 3 of the payment steps (see CIRD112100). Any excess over the cap is carried forward and treated as an amount of RDEC to which the company is entitled for the next accounting period.听

Under ERIS, any claim for tax credit in excess of the cap (where applying) is invalid.听

The PAYE cap does not apply if the company is exempt(see below).听

Relevant PAYE and NIC liabilities CTA09/S1112C & S1112D听

These must be identified for each payment period falling within the accounting period for which the claim is made.听听

鈥淧ayment period鈥� is defined at CTA09/S1141 as a period:听

The starting point (step 1) is the company鈥檚 own liabilities, to which are added liabilities of any connected company supplying the company with EPWsorperforming R&D contracted out by the company, where these liabilities are attributableto this (step 2). Finally, any element of the company鈥檚 own PAYE and NIC liabilities that is attributable to supply of EPWs or performance of R&D contracted out to the company by any connected company is removed (step 3). The steps are set out in detail below.听
听

Step 1

Identify the company鈥檚 total PAYE and NICs liabilities for the payment period, per CTA09/S1112D. This is the sum of amounts A and B, where:听

Step 2听

Add any amount produced by the application of CTA09/S1112C(4) or (6) to the company as company A (see below).听

Step 3

Deduct any amount product by the application of CTA09/S1112C(4) or (6) to the company as company B (see below).听

听PAYE & NIC liabilities in respect of EPWs supplied by connected companies (CTA09/S1112C(4))听
听
Per CTA09/S1112C(3), an amount is produced by CTA09/S1112C(4) if:听

Where these conditions are met, the following formula is applied for each of the affected EPWs and the results are added together to give the CTA09/S1112C(4) amount.听
听
X (Y / Z)听

Where:听

PAYE & NIC liabilities in respect of connected contractor payments (CTA09/S1112C(6))听
听

Per CTA09/S1112C(5), an amount is produced by CTA09/S1112C(6) where:听

The amount produced by CTA09/S1112C(6) is so much of the staffing costs of B that form part of B鈥檚 PAYE and NIC liabilities for the payment period.听

Exemption for companies actively managing intellectual property CTA09/S1112E听

The PAYE cap does not apply in accounting periods where a company meets both conditions A and B.听

Condition A听

A company meets this condition if it is creating or preparing to create relevant intellectual property (IP) or if it is performing significant management activities in relation to relevant IP that it holds.听

听These activities must be undertaken wholly or mainly by employees of the company. This does not include directors of the company (unless they are employees).听

听Meaning of creating, or preparing to create relevant IP (CTA09/S112E(2)(a) and (b))听

听A company that is carrying on R&D will satisfy this part of the test (even if the R&D is, ultimately, abortive) as will a company that is carrying out preparatory work before undertaking R&D (for example, scoping a project or seeking to understand potential markets). But the activity (whether creating, or preparing to create, IP) must be undertaken wholly or mainly by the company鈥檚 own employees 鈥� it cannot for example be met by subcontracting R&D.听

Performing management activities (CTA09/S1112E(2)(c))听

听Examples of 鈥渕anagement activity鈥� in relation to intellectual property are formulating plans and making decisions in relation to the development or exploitation of the intellectual property.听

This could include activity such as registering a patent or undertaking litigation. Such activities can involve engaging external professionals such as lawyers or patent agents who will not be employees.听

Again, the management activity must be undertaken wholly or mainly by employees of the company. This does not include directors of a company (unless they are employees). The condition does not require professionals such as those mentioned above to be employed by the company themselves, but the company must 鈥� via its employees 鈥� be managing that work and managing its relationship with the professionals.听

听The intellectual property being managed here must be owned by the company. Holding an exclusive licence for the IP will not meet this test. [The test does not require that all the IP arising from the company鈥檚 past R&D be owned.]听

听Companies must be performing a significant amount of management activities in relation to relevant IP.听

听Meaning of relevant intellectual property听

Intellectual Propertymeans any patent, trademark, registered design, copyright, design right or plant breeder鈥檚 right, or any rights under the law of a country or territory outside the United Kingdom which correspond or are similar to these. This can include know-how and trade secrets.听

听To allow know-how or trade secrets to qualify as relevant IP they must derive from R&D or from carrying on R&D and the greater part by value of the intellectual property must be created by the company.听

Condition B听

Condition B is that the sum of qualifying expenditure incurred in the accounting period on听

听does not exceed 15% of the company鈥檚 qualifying R&D expenditure for the period. This includes qualifying expenditure, where parties have jointly elected to be treated as connected.听