We know research and development (R&D) tax relief is a very beneficial tax incentive that allows many businesses to be rewarded by HMRC for investing in research and development.
But what benefits does R&D tax relief bring to a company?
There are two ways that an R&D tax claim can benefit you.
- corporation tax saving
- Increasing losses
Corporation Tax Saving
The main effect of an R&D tax claim is that it increases the expenses of the claimant. As costs are increased, this reduces profits and therefore reduces the corporation tax bill.
Let’s say we identify R&D costs of £100,000 (let’s work with easy numbers). This is uplifted by 130% and an R&D cost of £130,000 is included in the tax computation.
As the corporation tax rate is 19%, the R&D cost of £130,000 results in a tax saving of £24,700.
Saving the client £24,700!!
This means that approximately 25% of costs spent on developing new products, services, machinery or software can be recouped using a R&D tax claim.
Increasing Losses
What happens when the additional R&D costs result in making a tax loss?
There are five options in how you can utilise these tax losses.
- Use the loss against other income and gain in the year.
- Carry back the R&D loss to the previous year.
- Carry the R&D loss forward and use against future profits.
- Group relief enables the transfer of the loss to group members.
- Surrender your R&D losses for cash tax credits from HMRC.s
You can use a combination of the above.
For example, can carry back your loss to the previous tax year and then surrender the balance for payable R&D tax credits.
Each claimant will have its own objectives, so you should choose the option that helps you reach your goals.
Scenarios for SME Benefits
Scenario 1
Profitable company has spent £350,000 on qualifying R&D expenditure.
- The £350,000 qualifying cost is multiplied by the enhanced rate of 130%, which equals £455,000.
- The £455,000 is multiplied by the corporation tax rate of 19% to result in a corporation tax saving of £86,450, as a result of the R&D tax claim.
Scenario 2
A loss making company spent £200,000 on qualifying R&D expenditure. This is uplifted by 130% and £260,000 is included in the tax computation.
After the additional R&D tax deduction, the company makes a trading loss of £506,000.
This £506,000 can be either used:
- against current year income and gains (and then any of the below options)
- carried back
- carried forwards
- used in group relief
These options will result in a tax saving of £96,140, of which £49,400 is a result of the R&D tax claim.
Alternatively, the loss can be surrendered for payable R&D tax credits as follows:
The maximum amount that can be surrendered is the lower of:
- the trading loss - £506,000
- 230% of the R&D cost - £460,000
In this case it will be £460,000 that is surrendered.
The surrender is at 14.5%.
This will result in a R&D tax credit of £66,700.
The balancing loss of £46,000 (£506,000 - £460,000), can be utilised using the other options.
Summary
The benefits of claiming R&D tax relief are clear and highly valuable for companies. It enables companies that take a risk in creating new products, processes, machinery and software to be rewarded for that risk.
The monies saved by paying less tax or the cash received for surrendering losses can be reinvested in marketing the new product created, hiring staff or creating new products.