There are various ways you can receive research and development (R&D) tax relief. This is determined by factors outside of your control including your company’s financial performance and the type of R&D tax scheme that applies to your company.
In loss making situations, you will have more control in deciding how to receive your relief.
SME scheme
Using the SME scheme, there are a possible five outcomes you could receive the benefit of R&D tax relief. The one appropriate for you depends on whether you are profit or loss-making. Again, in some cases you have some choice on how you receive the relief.
Corporation tax refund
R&D tax credits can be claimed for the previous two accounting periods. If you make a claim for a period where you have already paid your corporation tax, your company tax return is amended to include the R&D tax relief, resulting in a smaller tax bill. As your tax bill is less, HMRC issues a refund of the difference between your original tax bill and your amended tax bill.
Corporation tax saving
If your CT600 (company tax return) is yet to be submitted to HMRC, we can provide you (more accurately your accountant) with the R&D figures to include in the CT600 and tax computation. This will reduce your tax liability.
Loss relief
If the company is loss making after including the R&D figures, you can use the loss as follows:
- use against profits in the current year (immediate tax saving)
- carry back the loss to the previous year and use against profits (immediate corporation tax refund)
Temporary extension - For accounting periods ending between 1 April 2020 and 31 March 2022, there is a temporary extension of the carryback period to 3 years, with losses used against later years before earlier years.
- carried forward and offset against future profits (may get a bigger saving depending on corporation tax rates but will have to wait until the next period ends so not a great cash flow option).
- use it under group relief (immediate corporation tax refund)
Cash payment
Another option for a loss making company is to surrender your loss in exchange for cash. The option of a cash payment is useful for companies who need to boost cash flow and it can be 33.35% of qualifying expenditure.
This option is popular for companies looking at improving their immediate cash flow.
Combination
For a profit making company, the options are straightforward.
When the company makes a loss, you need to look at your company goals (and personal goals) and cash flow forecasts to decide the best option for you.
You could use your losses against the previous year profit, group relief and surrender them for the cash payment for the ultimate cash flow boost.
Each option should be discussed with your R&D adviser.
RDEC
The RDEC scheme is generally for larger companies (more than 500 employees) and it works differently to the SME scheme. You can read How will I receive my R&D tax relief using RDEC.
