How Does the Benefit Work for the SME Scheme?

There are several ways in which R&D tax credit benefits can be realised; the method of recovery varies depending on the claimant’s tax position and profitability.

Apogee Associates R&D Tax Credits

The Headlines

Put simply your benefit will range from 14.35% to 33.35% of your qualifying expenditure, depending on your tax position. You will always have the option to receive 24.7% of your qualifying expenditure.

The Details

The R&D application works by enhancing the costs you’ve already incurred in relation to the R&D and adding this to the qualifying expenditure. Using an example of £100k of qualifying expenditure, the R&D tax credit uplifts this £100k by 130% (£130k). This is then added to the initial costs incurred, leaving you with £230k of enhanced qualifying expenditure.

For profit making companies:

Corporation tax refund for prior financial years

  • Should you recover R&D tax credits for prior financial year(s) where corporation tax has already been paid, you can receive a cash refund from HMRC.
  • This is refunded at the corporation tax rate for the financial year (19% for all prior years).
  • In our example, the £230k of enhanced qualifying expenditure will generate a benefit of £43.7k.
    • £100k of costs will have already been incurred and included in your accounts, creating a reduction in corporation tax of £19k (£100k x 19% = £19k)
    • You will receive an additional £130k tax deduction, generating a benefit of £24.7k (£130k x 19% = £24.7k)
  • Companies would benefit from £19k (first bullet point) reduction in Corporation Tax regardless of the R&D application. Therefore, this results in a refund £24.7k (second bullet point), or roughly 25%, of your initial qualifying expenditure, generated by the R&D application.

Reduce tax payable in a current financial year

  • When recovering R&D tax credits for a financial year in which corporation tax has not yet been paid, the benefit can be used to reduce your corporation tax liability for that year.
  • As above, the £100k of qualifying expenditure is enhanced by 130% to £130k. The £130k is then added to the qualifying expenditure of £100k to form the enhanced qualifying expenditure of £230k, generating a reduction in corporation tax of £43.7k. As for the refund scenario above:
    • £100k of costs will have already been incurred and included in your accounts, creating a reduction in corporation tax of £19k (£100k x 19% = £19k)
    • You will receive an additional £130k tax deduction, generating a benefit of £24.7k (£130k x 19% = £24.7k)
  • This results in an additional reduction in corporation tax liability of £24.7k, or roughly 25% of your qualifying expenditure, generated by the R&D application.
How Does the Benefit Work for the SME Scheme?

What if there’s some left over?

  • Using the above example, if your qualifying expenditure is generating a refund or reduction in corporation tax of £24.7k, but you have only paid (or are liable to pay) a corporation tax bill of £10k, the remaining £14.7k is treated as a loss.
  • The method in which the R&D scheme can utilise your losses is explained below.

For loss making companies

Cash credit

  • If you are a loss-making company, the R&D application will enhance your tax loss, giving you the option to surrender your tax losses at 14.5% for a cash tax repayment from HMRC. This can be beneficial in scenarios where there is a need for cash influx into the company.
  • In our example, the 230k of enhanced qualifying expenditure will generate a cash credit of £33.35k. As the R&D scheme is the mechanism that enables you to surrender the loss for cash, it provides a 33% benefit from the initial qualifying expenditure of £100k.

 

Carry forward tax losses for future years

  • Another option for loss-making companies is to carry forward tax losses generated by the R&D recovery for future years. This can be beneficial if the company is predicted to be profit making in their next financial year, as the benefit is taken at the corporation tax rate at the time (currently 19%).
  • As above, the 100k of qualifying expenditure is enhanced by 130% to £130k. The £130k is then added to the qualifying expenditure of £100k to form the enhanced qualifying expenditure of £230k, generating a reduction in corporation tax of £43.7k. As for the profit making scenario:
    • £100k of costs will have already been incurred and available to carry forward, creating a reduction in future corporation tax of £19k (£100k x 19% = £19k)
    • You will receive an additional £130k tax deduction to carry forward, generating a future benefit of £24.7k (£130k x 19% = £24.7k)
  • This results in a future reduction in corporation tax liability of £24.7k, or roughly 25% of your qualifying expenditure, generated by the R&D application.
R&D tax Credits Benefits SME Scheme

What if I’ve made a small profit/loss?

  • If you’re in a situation where you’re making a small profit or loss, your benefit can be restricted to the lowest rate of recovery (19%).
  • This is because of a rule that restricts the recovery by putting a limit on the surrenderable loss. This limit is equivalent to the trading loss for the period.
  • Put simply, if you’ve made a small profit, the enhanced taxable deduction resulting from the R&D application will tip you into an artificial loss.
  • If this loss is less than your enhanced qualifying expenditure, your recovery is based on the loss, and not the 230% enhanced qualifying expenditure.
  • At Apogee, we always strive to provide the best value for our clients. In scenarios of restricted benefit, we cap our fee, to ensure our clients’ recovery net of our fee remains the best in the industry.

 

 

 

It is important to distinguish between the cash recovery and the actual benefit that is received as a result of the scheme. Whilst the cash recovery in loss making scenarios can be as high as 33%, you should be aware that you are surrendering the option to otherwise carry forward your original losses to be offset against future profits (providing you have sufficient future profits to be offset).

  • In the scenario where your qualifying expenditure is £100k, you would have been able to carry your losses forward and offset these against future profits, at a benefit of £19k (£100k x 19% = £19k).
  • As a result of the R&D application, the £100k QE is enhanced by 130%, meaning an additional £130k deduction (£230k in total). Providing company losses are sufficient, the entire £230k can be eligible to be surrendered at 14.5%, generating a Tax Credit of £33.35k.
  • Whilst the cash recovery today is £33.35k, you may have been entitled to a £19k reduction in the future (providing you would have sufficient profits in the future to be offset). As such, the actual benefit received is the additional £14.35k (£33.35k – £19k = £14.35k).
R&D Tax Credits SME Scheme