When claiming R&D tax relief, companies can choose to use their qualifying R&D expenditure as a tax credit – or in other words a cash payment. This process of surrendering losses only applies if they are in a tax loss position as per the tax computation (and not necessarily the financial statement’s position).
Tax credits are available under both the SME and RDEC schemes, though the amount of cash benefit the company receives will depend on the R&D scheme the company is claiming under. As each company’s circumstances will be specific to them there is no one-size-fits-all solution for the right situation to surrender losses. The purpose of this overview is to provide additional detail into those important factors that should always be considered for each company’s individual circumstances.
Factors to consider to aid the decision process of when or if a tax credit is the appropriate decision for your company:
If you surrender for a tax credit, if the company subsequently turns to profit and the benefit of hindsight says, “we would have been better to carry forwards.” This can be rectified by filing an amended tax return providing the tax return period is still open, the tax credit would be immediately due to be re-paid to HMRC with interest though.
If we first look at the specific options available under each scheme.
When an SME company is in a tax loss position, they have 4 options as noted below:
a. The total loss in the period (after the R&D claim) or
b. the total enhanced R&D expenditure figure.
Any surplus loss that is not related to the enhanced R&D expenditure can be carried forward and offset against future taxable profits.
Note at current SME rates:
Enhanced R&D expenditure = Qualifying Expenditure *130% (Tax computation adjustment)
Total Enhanced R&D expenditure = Qualifying Expenditure *230% (CT600 form)
The above are the 4 options available and whilst one company’s position may allow for just 1 of the options to be used, others may use a combination of methods according to their individual and specific circumstances.
HM Treasury designed the RDEC scheme so that the RDEC adjustment is accounted for in the Income Statement (above the tax charge line) rather than as part of the tax adjustment in the corporation tax computation. That is why the best practice is to record the RDEC adjustment as a credit in other income.
When a company is in a tax loss position and intending to claim a tax credit under the RDEC scheme this is based on the RDEC figure, which is currently calculated at 13% of the qualifying R&D expenditure. The tax credit amount is then calculated net of the Corporation Tax liability accrued on the RDEC income being recognised in the P&L, currently 19%.
A company has 3 options as noted below:
In order to surrender losses for a tax credit under the RDEC scheme, there are steps that must be followed in a specific order.
Before you are able to claim the cash credit under the RDEC scheme there may be other tax obligations that you need to pay before HMRC will make the payment, again this is different from the SME scheme. For example:
Yes, each scheme has its own specific requirements restricting the amount of a payable tax credit, the intention is to prevent companies taking more from the pot that they put in whilst still encouraging innovation. The differences between the caps are explained below:
The SME cap
For full accounting periods starting from 1 April 2021 (so first full 12-month accounting period ended 31st March 2022).
The payable tax credit is capped at
3 x total PAYE
NIC (employers and employees) paid to HMRC for all employees within the company
If a company, therefore, has no employees, PAYE, or NIC contributions the maximum payable tax credit is £20,000.
The RDEC cap
The payable tax credit is capped at
NIC (employers and employees) paid to HMRC relating only to employees included in the RDEC claim
(i.e., not the entire company employees).
Amounts in excess of the cap can be carried forward for use in future periods.
These are the main points to take into consideration and often the decision involves an element of polishing the crystal ball to look into the future, hopefully, this overview allows you to make an informed decision as to the right course of action for your circumstances with the facts at hand overlayed against best predictions of future activity.