Key employee provision 

For periods commencing on or after 01/01/2012, key employees who have been involved in R&D activities can benefit from a ‘key employee’ provision, which effectively allows them to receive part of their remuneration tax free. This is subject to complicated rules and should be investigated thoroughly; some of the key points to note are:

  • The employee cannot be a director of, or have a material interest in, the company or be connected to such a person.
  • The employee must spend at least 75% of their time on R&D activities (i.e. the conception or creation of new knowledge, products, processes, methods, or systems) and at least 75% of their emoluments must qualify for the credit; in both cases the threshold has been reduced to 50% for periods commencing on or after 01/01/2013.
  • The amount of credit that can be surrendered to key employees is capped at the amount of corporation tax due by the company before taking the R&D tax credit into account, i.e. the company must be tax-paying.
  • The employee’s effective rate of income tax cannot be reduced below 23%.


Finance (No.2) Act 2013 introduced changes to the provision:


  • In the event of an incorrect claim of the R&D tax credit, the tax foregone will be recovered from the company instead of the employee.
  • In the event a company is found to have made a claim which is “deliberately false or overstated”, the company will be chargeable to tax under Case IV on an amount equal to 8 times the amount that was paid to the employee.


If you would like further information about the use of the key employee provision, please contact us.


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