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Can I still claim R&D tax credits if I don’t pay any PAYE and NIC?

Chris Alderson senior tax manager
Associate Director
(Last updated on )

You can still claim research and development (R&D) tax credits if you don’t pay any PAYE and national insurance contributions, as long as you would otherwise qualify.

Previously, you couldn’t claim a cash credit if you hadn’t paid any PAYE and NIC, which has resulted in some confusion. But this restriction was abolished in 2012. This means you may be able to claim based on other qualifying expenditure, even if no salaries have been drawn. However, the amount you can claim as a cash credit may be restricted, as HMRC has recently introduced a PAYE/NIC cap for SME tax credit claims.

If you have outstanding PAYE, NIC or other liabilities with HMRC, read our blog to find out how this might impact your R&D tax credit claim.

How you claim under these circumstances will depend on whether you are using the SME R&D tax credit scheme or the research and development expenditure credit (RDEC). This article will explore how R&D tax credits work if you have paid no PAYE or NIC in both cases.

Claiming R&D tax credits using the SME R&D tax credit scheme with no PAYE or NIC

Until 2012, you could not claim an R&D tax credit if you had paid no PAYE or NIC. Typically, this rule would exclude companies in the start-up phase which did not pay salaries. But with this rule abolished, you are now free to claim.

As well as salaries and employer national insurance contributions, any pension contributions and money spent on subcontractors and freelancers also qualify as R&D expenditure. There are other costs that may be applicable too. These include the cost of materials used up in the R&D process, and consumables like heat, light and power. Some software costs also qualify.

However, a cap has been introduced to restrict the amount of cash credit that can be claimed by SMEs. For accounting periods beginning on or after 1 April 2021, the SME R&D tax credit cap allows a company to claim up to £20,000 plus 300% of their total PAYE and NIC liability. This means a loss making company with no staff costs would be restricted to claim only £20,000 unless they meet the exemption criteria.

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); and
  • The company does not 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.

The SME company making the claim is required to confirm to HMRC their employer PAYE reference and the total amount of PAYE/NIC incurred during the period in their Corporation Tax return.

What costs qualify for R&D tax credits?

You can claim research and development (R&D) tax credits on revenue expenditure, i.e. day-to-day operational costs. But you usually cannot include capital expenditure (money spent on fixed assets such as land and buildings) within the R&D tax credit claim.

How ForrestBrown can help companies using the SME scheme

It is often salaries that form the bulk of an R&D tax credit claim. But some projects will contain substantial other types of expenditure that make claiming worthwhile. If you are an innovative SME that pays no PAYE or NIC, you should contact ForrestBrown for an eligibility assessment.

We can help you to review your qualifying R&D activities and costs so that you can understand what your claim might be worth. For a detailed breakdown of qualifying expenditure, check out: What costs qualify for R&D tax credits?

Claiming R&D tax credits using RDEC with no PAYE or NIC

For larger companies, this question will most likely arise if you are part of a group and your salaries are paid from a non-UK company. Under RDEC, this will not stop you claiming. However, it might affect when you receive the benefit of your claim.

If you receive your claim benefit by offsetting your Corporation Tax liability, then not paying PAYE or NIC will have no bearing on your claim.

However, once your Corporation Tax liability has been offset, you might also be due a cash credit. This cash credit could be affected by PAYE and NIC. RDEC cash credits are restricted to the total amount of PAYE and NIC paid for employees carrying out R&D activities and included in your claim.

You do not lose this claim benefit though. Amounts in excess of the cap can be carried forward for use in a future period. So, if you are carrying out qualifying R&D activity it would be a mistake not to claim just because you have paid no PAYE or NIC.

How ForrestBrown can help large companies

If your business could be considered innovative but has not paid PAYE or NIC, call us for expert advice. If you have previously misunderstood the rules or received poor advice, you may be able to claim for your last two accounting periods. The cash benefit is regularly transformative and could have a profoundly positive impact on your business.

ForrestBrown’s expert technical firepower may be able to identify scope for improved R&D record-keeping to provide evidence for a future claim. For instance, timesheets to support qualifying indirect activities. If people have been missed from a claim, this could have adversely affected your PAYE and NIC cap.

Now that you understand that paying no PAYE or NIC does not prevent you claiming R&D tax credits, it is worth exploring how much your claim could be worth.

This article was last updated on