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HMRC internal manual

Capital Allowances Manual

PMA: FYA: First-year tax credits: the amount of payable tax credit, the upper limit of relief, PAYE & NICs liabilities, interaction with R&D tax credits

CAA01/Sch.A1 para 2, para 17

Amount of payable tax credit

The amount of first-year tax credit to which a company is entitled is the lower of

  • the relevant percentage of the surrenderable loss for the chargeable period
  • the ‘upper limit’

Relevant percentage

Before 1 April 2018, the percentage rate was fixed at 19%.

For chargeable periods starting on or after 1 April 2018 the ‘applicable percentage’ is calculated in accordance to a formula.

Usually, the applicable percentage is 

  • Two-thirds of the rate of corporation tax chargeable on profits of the qualifying activity concerned for the chargeable period, or 
  • If there is more than one rate, the average of the rates over that period.

However, if the profits are ring fenced profits (OT00020), the applicable percentage is

  • Two-thirds of the rate of corporation tax (adjusted if necessary as a result of section 279B or 279C of CTA 2010 (marginal relief) chargeable on those profits for the most recent previous chargeable period in which the company made a profit in carrying on the qualifying activity, or
  • If the company has never made a profit in carrying on the qualifying activity, two thirds of the small ring fence profits rate for the chargeable period, and
  • In either case, if there was more than one rate, the calculation should be based on the average of the rates over the period.

If the formula produces a figure with more than 2 decimal places, it is to be rounded up to the nearest second decimal place.

Upper limit

A company cannot claim more than the ‘upper limit’. The upper limit is the greater of:

  1. the company’s total PAYE and NIC liabilities for payment periods ending in the chargeable period and
  2. £250,000.

The PAYE liability for a payment period is the income tax which the company has to account for under the PAYE regulations, ignoring any deduction that the company may make for child tax credit or working tax credit.

The NIC liability for a payment period is the Class 1 NIC which the company is required to account to HMRC for, ignoring any deductions the company is authorised to make for payments of statutory sick pay, statutory maternity pay, child tax credit or working tax credit.

A payment period is a period which ends on the 5th of the month and for which the company is required to account for income tax and NI contributions.

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Interaction with research & development tax credits

A company may be eligible to claim R&D tax credits as well as first-year tax credits. There is no interaction between the maxima or upper limits in these tax credit regimes and the first-year tax credit upper limit is not reduced when a company claims an R&D tax credit.