Research and Development Tax credit – Labour costs.

TIP: Research and development tax credit legislation consists of guidance on a number of areas. Below are some comments on particular area related to tax relief on labour costs.

Research and Development tax credit regime has a number of small changes over the years. Amendments to legislation have more often the not been designed to reduce the abuse of the R&D tax credit regime and also help prevent fraud. In this post we discuss one of most recent changes that many small business owners may not be aware of.

R&D tax credits available to companies are subhect be subject to a specified limit which will be effected by the amount of its PAYE.

This measure limits the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.

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.

Often companies do outsource some of their labour abroad or use freelancers based abroad, which is now very common in today’s economy. By brining in the condition in relation to subcontract element of Research and Development expenditure, the governmnet is attempting to encourage companies to use UK labour.


It is the governments intention to continue to support and actively encourage companies to invest in Research in Development as part of it strategy. However they are actively claiming down on misuse of this generous scheme.



There are various other criteria that need to be detailed. To find out more and to see if your business qualifies, contact AGA Accountants in Aylesbury servicing a national portfolio of businesses and individuals.

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