The arithmetic on this page produces a payable credit of £194,184 and pays £92,000, because the PAYE cap decides the answer rather than the rates do. Example Interfaces Ltd is illustrative and so are its figures. The more useful half of the page is what happens after the cap has been applied: the company still has to decide how much trading loss to surrender for that £92,000, and surrendering all of it writes off £705,200 of loss that buys nothing.
The period is 1 April 2025 to 31 March 2026, and the claim is made under Enhanced R&D Intensive Support, CTA 2009 Part 13 Chapter 2, on the rules for accounting periods beginning on or after 1 April 2024.
Example Interfaces Ltd develops augmented reality software for industrial maintenance. The field’s published registration methods align a virtual overlay by tracking visual features in the camera image, and their documented accuracy falls away on unmarked metal surfaces under variable plant lighting. The advance sought was a registration method holding alignment to within a centimetre on that class of surface. The scientific or technological uncertainty was whether feature-sparse metal could be tracked at all from a hand-held device without physical markers, and how any such method would behave once the plant was running and vibrating. It was resolved across eleven months of measured trials against instrumented rigs.
Two founders and one employee sit on the payroll at modest salaries. Most of the development work is contracted out to an unconnected UK software house. That combination, a small UK payroll set against large subcontracted R&D spend, is the profile the cap was written for.
What does the company spend, and is ERIS available?
| Cost category | Amount | Qualifying element |
|---|---|---|
| Staffing costs, apportioned to the R&D | £96,000 | £96,000 |
| Contractor payments, unconnected, R&D undertaken in the UK | £900,000 | £585,000 |
| Software, data licences and cloud computing | £39,000 | £39,000 |
| Qualifying expenditure | £720,000 |
Payments to unconnected subcontractors qualify at 65%, which is why £900,000 of contracted-out R&D contributes £585,000 and not £900,000.
Total relevant expenditure for the period is £1,180,000, and the trading loss before the additional deduction is £1,000,800. Relevant PAYE and National Insurance contributions for the period are £24,000.
Intensity is £720,000 divided by £1,180,000, or 61.0%, comfortably over the 30% condition. ERIS is available.
Working out the cap
The cap is £20,000 plus 300% of relevant PAYE and National Insurance contributions, under CTA 2009 s1112B.
| Element | Figure |
|---|---|
| The fixed amount, proportionately reduced for a period under twelve months | £20,000 |
| 300% of relevant PAYE and National Insurance contributions of £24,000 | £72,000 |
| The cap for the period | £92,000 |
“Relevant” does work in that phrase, and what the PAYE cap is sets out how connected-party supplies move the figure in both directions. Here neither direction applies: the subcontractor is unconnected, so it brings nothing to the cap, and £24,000 is the whole of it.
Can the exemption lift the cap here?
No. Section 1112E lifts the cap entirely, but only where both of its conditions are met, and this company fails the first of them.
Condition A wants the company’s own employees doing the work that creates or manages its relevant intellectual property, and Example Interfaces has contracted that work out. Condition B, the 15% limit on connected-party contractor and externally provided worker spend, is met, because there is no connected-party spend at all. Both are needed, so there is no exemption.
The claim, uncapped and capped
| Step | Figure | Reference |
|---|---|---|
| Qualifying Chapter 2 expenditure | £720,000 | |
| Additional deduction at 86% | £619,200 | s1044 |
| Unrelieved trading loss | £1,620,000 | |
| 186% of qualifying Chapter 2 expenditure | £1,339,200 | s1055 |
| Surrenderable loss, the lesser of the two | £1,339,200 | s1055 |
| 14.5% of the surrenderable loss | £194,184 | s1058(1)(a) |
| The cap | £92,000 | s1112B |
| The credit, the lesser of the two | £92,000 | s1058(1) |
The claim value calculator returns the uncapped £194,184 for these figures, because it applies headline rates and does not model the cap. That is what its disclaimer says, and this page is the reason for the disclaimer.
How much loss should the company surrender?
HMRC’s manual treats a claim for a credit above the cap as invalid rather than merely restricted, so the company cannot simply claim £194,184 and accept £92,000. Correcting that after filing means amending within two years from the end of the period of account, and then only if the company notices.
The loss written off is measured by the claim, not by the cash. Section 1062 reduces the losses carried forward by the loss in respect of which the company claims the credit. Surrender more than the cap will pay for and the balance goes with it for nothing.
| Approach | Loss surrendered | Credit | Loss carried forward |
|---|---|---|---|
| Claim on the full surrenderable loss | £1,339,200 | invalid: above the cap | nil |
| Surrender the full loss, claim the capped figure | £1,339,200 | £92,000 | £280,800 |
| Size the surrender to the cap | £634,000 | £91,930 | £986,000 |
The third row is the answer. £634,000 at 14.5% is £91,930, inside the £92,000 cap, and £986,000 of loss survives for relief against future profits. The second row writes off £705,200 of loss more than it needed to, worth £176,300 of future relief at a 25% rate. Check that second row’s carried-forward figure yourself: £1,620,000 less £1,339,200 surrendered leaves £280,800.
The capped credit on that third row, £91,930, is worth 12.77p per £1 of qualifying spend against the 26.97p headline. Whichever figure the company settles on is the one that goes on the CT600L and into the surrender written into the tax computations, so the sizing decision has to be made before the return is filed rather than reconstructed afterwards.
Would the merged scheme pay more?
gov.uk’s guidance says: “Even if you are eligible for ERIS you can choose to claim under the merged RDEC scheme, but you cannot claim under both schemes for the same expenditure.” For this company that choice matters, because the merged scheme sits in CTA 2009 Part 13 Chapter 1A and treats a capped credit differently from the way Chapter 2 does.
| Step | Figure |
|---|---|
| Qualifying R&D expenditure | £720,000 |
| Expenditure credit at 20% | £144,000 |
| Step 1, set against corporation tax for the period | nil, the company is loss-making |
| Step 2, notional tax at the 19% small profits rate | £27,360 |
| Amount reaching step 3 | £116,640 |
| Step 3, the cap | £92,000 |
| Amount restricted by the cap, carried forward under s1042J | £24,640 |
| Step 7, paid in cash | £92,000 |
| ERIS, sized to the cap | Merged scheme | |
|---|---|---|
| Cash this period | £91,930 | £92,000 |
| Value carried into the next period | none | £24,640 as a credit |
| Trading loss carried forward | £986,000 | £856,800 |
The third line needs care, because the two schemes move the loss in opposite directions. ERIS adds an 86% deduction, taking the loss to £1,620,000, and then writes off the £634,000 surrendered. The merged scheme adds no deduction at all, and s1042H requires the £144,000 credit to be brought into account as a receipt of the trade, so the loss falls from £1,000,800 to £856,800.
Set against each other, the merged scheme pays £70 more in cash, carries £24,640 into the next period, and leaves £129,200 less trading loss, worth £32,300 at a 25% future rate. The carried-forward £24,640 is not banked either: it enters the next period’s steps at step 1 and meets the next period’s cap again, so a company whose payroll stays small can see the same amount deferred more than once.
Which route wins therefore turns on when the company expects to make profits and on what its payroll does next year, and the rates answer neither question. What the cap does is close the gap the rates open, 26.97p per £1 becoming 12.77p, and turn a choice that looked settled into one to model on the company’s own numbers before filing rather than after.
What changes the answer
- A bigger payroll. Relevant PAYE and NIC of £58,061 would give a cap of £194,183, so the credit would be restricted by £1 rather than by £102,184. The cap is a payroll test, not a spending test.
- A short accounting period. The £20,000 is proportionately reduced for an accounting period of less than twelve months, so a six-month period starts from £10,000.
- Claiming both schemes in the same period. Uncommon, and never a way of relieving the same spending twice. Where it happens the company gets one cap and not two: s1112B(4) reduces the merged-scheme cap by any credit already obtained under Chapter 2 for the period.
- Bringing the work in-house. Employing the developers rather than contracting them out raises relevant PAYE and NIC, raises the cap with it, and can bring condition A of the exemption into reach. Model it before the year end.
Talk it through with a chartered adviser
The calculator linked above will not settle this claim, and neither will the tables on this page. What decides it is a sequence of judgements: which scheme to elect, how much loss to surrender, and whether the exemption is arguable on the facts. What the PAYE cap is sets out the rules behind this example, and the other costed claims sit in the worked examples library.
A chartered adviser sizes the surrender and signs the claim off before it is filed, and enquiry support is included as standard. If the cap is anywhere near your figures, get in touch while the period is still open.
Sources
- CTA 2009 s1112B — the cap: £20,000 plus three times the company’s relevant PAYE and NIC liabilities, with subsection (3) proportionately reducing the £20,000 for a period under twelve months and subsection (4) reducing the merged-scheme cap by any Chapter 2 credit obtained for the same period.
- CTA 2009 s1112E — the exception: condition A on relevant intellectual property created by the company’s own employees, and condition B’s 15% limit on connected-party contractor and externally provided worker expenditure.
- CTA 2009 s1044 — the additional deduction of 86%.
- CTA 2009 s1055 — the surrenderable loss: the unrelieved trading loss, or 186% of the qualifying Chapter 2 expenditure if less.
- CTA 2009 s1058 — subsection (1), the credit at the lesser of 14.5% of the surrenderable loss and the cap.
- CTA 2009 s1062 — losses carried forward reduced by the loss in respect of which the company claims the credit, measured by the claim rather than by the cash received.
- CTA 2009 s1042I — the seven payment steps, with the cap applied at step 3.
- CTA 2009 s1042J — the amount restricted by the cap added to the credit for the next accounting period.
- CTA 2009 s1042H — the expenditure credit brought into account as a receipt in calculating the profits of the trade.
- CTA 2009 s1042K — the notional tax deduction at step 2.
- CTA 2009 s1136 — the qualifying element of a contractor payment: 65% of the relevant portion.
- CIRD140000: the PAYE cap — the £20,000 plus 300% formula, the relevant PAYE and NIC figure including connected-company adjustments, the exemption conditions, the carry-forward under the merged scheme, and a claim above the cap being invalid under ERIS.
- CIRD122000: the ERIS calculation — the company may claim in respect of all or part of the surrenderable loss, and the surrender is effected by writing the losses off in the tax computations.
- Merged scheme and ERIS guidance — including that a company eligible for ERIS can choose to claim under the merged RDEC scheme instead, but cannot claim under both schemes for the same expenditure.
- SI 2023/813 — the Additional Information Form regulations, including the disclosure of reliance on the cap exemption.
Every CIRD paragraph cited above is indexed on our CIRD reference index, with HMRC’s own title for each, a line on what it says and the date HMRC last revised it.