This example shows the RandDTax Claim summary, and how and where those numbers work through to the tax computation & CT600.
Qualifying R&D expenditure (100%) £300,000
R&D Enhancement/additional deduction (130%) £390,000
R&D Enhanced Expenditure (230%) £690,000
In the example the profit chargeable to Corporation Tax before any other reliefs is £212,500.
The R&D claim reduces the tax payable for the year to zero saving £40,375 at 19% CT.
It creates the option for a payable tax credit of £25,738 by surrendering a loss of £177,500 of losses. Surrendering means those losses are not carried forward.
The PDF below highlights the key numbers in the tax computation and CT600 in order to correctly claim the above benefits.
Sometimes R&D claims don't generate cash.
It is important to understand that as an R&D additional deduction (130% of the qualifying costs) is part of the trading results it is made earlier in the tax computation than other reliefs. So If for example the £212,500 included charity relief, group relief, or carried losses. These would need to be excluded from the R&D calculation starting profit, as it needs to reflect the in year result before any reliefs that come later in the calculation. In cash flow terms some elements of an R&D claim may be neutral as the R&D deduction simply replaces other reliefs, but in the case of carried losses and group relief those losses are preserved and if they cannot gain relief in the current year can in future years depending on profitability. The CTA2009 is very clear that reliefs from outside the years trading result cannot be used as part of surrenderable losses. Those reliefs can only relief profits which should be a well understood accountancy principle. But is an issue the non accountant should be aware of in deciding to claim R&D relief.
For example with the R&D expenditure above if the taxable profits had been zero, due to £500,000 of brought forward losses being set against £500,000 of profit, all an R&D claim would do is create an extra £390,000 of losses to carry forward. £500,000 minus £390,000 does not create a loss, and R&D Tax Credits are only available in situations of trading loss. This may be of value depending on the level of other existing losses brought carried forward and future profit
R&D claims are a specialist activity. Any form of error in a claim can lead to either a company not gaining what they are entitled to or an HMRC enquiry. Please if you have any uncertainties about the claim process and how claims are correctly made get in touch and we can help.
Christopher Toms MA MAAT – Technical Director RandDTax