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 new merged RDEC scheme and ERIS scheme, 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:
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’ in the Income Statement. However if this is not possible, due to the accounts already being published, then the RDEC adjustment will need to be made in the Tax computation.
When a company is in a tax loss position and intends to claim a tax credit under the RDEC scheme, this will be based on the RDEC figure and calculated as a percentage of the qualifying R&D expenditure. The current rate is 20% of qualifying R&D expenditure incurred on or after 1 April 2023.
There is an RDEC seven step process, for calculating how the company can best utilise the tax relief generated from the RDEC relief, where the company is in a loss position.
Unless the company is exempt from the cap, there is a restriction that any RDEC payable amount is capped at £20,000 plus 300% of the company’s total expenditure on PAYE and NIC liabilities for the same accounting period. If the RDEC amount exceeds the cap, this amount is carried forward and utilised in a future accounting period. (see RDEC step 3).
For a company making a tax loss in the period, there are potentially the following options as noted below:
RDEC step 4 : Discharge any outstanding corporation tax liabilities of the company
If the company has any unsettled corporation tax liabilities for any other accounting periods, the RDEC that is due can be used to offset against these outstanding Corporation Tax liabilities that were due for a previous period.
RDEC step 5 : Group relief
If the company is a member of a group for tax purposes, it can surrender the whole or any part of the remaining RDEC balance, to any other group member. The group company can then offset the RDEC adjustment against their Corporation Tax liability. This would provide a benefit of 25% to the group company.
RDEC step 6 : Discharge any other liability of the company
The company can offset the RDEC to pay any other tax liability of the company, for example a VAT or PAYE liability.
RDEC Step 7 : Immediate cash refund
The final step allows any amounts that remain after all of the 6 previous steps have been considered, to be paid as a cash refund. This amount, net of the notional tax is then payable to the company, provided it is a going concern.
From 1 April 2023 this will be at 75% of the RDEC value. A 25% Corporation Tax rate is applied when calculating an RDEC tax credit for expenditure incurred from 1 April 2023, the 25% is then carried forwards and offset against future periods profits or group relieved.
Where an entity’s Accounting Period straddles the 1 April 2023 the above rates are applied pre and post 1 April 2023
The Enhances Intensive R&D support applies to SMEs where they can claim a payable tax credit, which is not liable to tax, worth up to 14.5% of the surrendered loss. This only applies to companies that meet the ‘intensity condition’ and is for accounting periods beginning on or after 1 April 2024.
A company meets the intensity condition if the R&D expenditure is at least 30% of its total expenditure, either included in the Income Statement plus R&D costs capitalised as Intangible Fixed Assets (s1308 CTA2010) that are allowable for tax purposes (including that of any connected companies).
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.
