Different benefit options available for your R&D tax relief benefit..

Benefit Options

There are a number of different factors that go into determining the benefit option for your R&D tax relief benefit, such as the business’ financial position, what scheme they are claiming under (SME or RDEC), as well as the client’s wishes in certain scenarios. They could receive it as a cash payment, a Corporation Tax reduction, the carry forward or back of an enhanced loss, or a combination of these.

The reason the tax relief is treated differently under the SME scheme and RDEC, is that the tax relief from the SME scheme primarily reduces your taxable profits. The benefit you receive from the RDEC scheme however is visible “above the line” as income in your accounts. The credit itself is taxable income and ultimately reduces your corporation tax liability or in certain circumstances can be paid as a cash credit.

SME Scheme

Under the SME scheme, there are five potential ways in which you can receive your benefit, with the appropriate method selected first on whether the company is profit/loss making, with the client preference then making an appearance in certain circumstances. The five possibilities are:
1. A tax rebate
Because R&D tax relief can be claimed for the previous two accounting periods, if a claim is made for a period in which corporation tax has already been paid, your company tax return is amended and HMRC will issue you with a repayment, together with interest thereon
2. A corporation tax saving
If, however, a claim is made in the same year that you file your original corporation tax return, and you have a corporation tax liability, then the relief will first come in the form of a reduction in corporation tax.
3. Loss reliefs
If your company is in a loss-making position (before or because of the R&D Tax relief claim), then you have several loss relief options available:

  • Carry this back to the previous year, if the previous year was in profit.
  • Carry this forward to offset against future trading profits from the same trade, if a future year is in profit. There is no time limit for the carry forward of the loss.
  • Surrender the loss for group relief (where applicable)
Carrying  a loss forward will deliver a greater amount of relief than a cash credit (see below) if you think you will be profitable in the future… and you can wait that long! But, as they say, cash is king!
4. A cash credit
If your company is in a loss-making position, you can instead choose to receive a cash payment and surrender your R&D enhanced losses. This can be an attractive option as it can give a much needed boost to cash flow. However, the cash credit is at a reduced rate of 14.5% compared to the current rate of Corporation Tax of 19%.
5. A combination
If the company’s position changes from profit to loss as a result of the R&D tax credit claim, you could:
  • Receive back the corporation tax already paid.
  • Make a corporation tax saving as well as utilise the resulting losses by carrying these backwards or forwards.
  • Make a corporation tax saving as well as claim a cash credit in return for surrendering those losses.
There exists many different circumstances and combinations of business positions, which can result in the relief being utilised in many different combinations of the above mechanisms.

Research and Development Expenditure Credit (RDEC)

If you are claiming R&D tax relief under the RDEC scheme, the benefit is realised in a different way. Unlike when claiming as an SME, profit and loss making companies claiming under the RDEC scheme are treated exactly the same when it comes to their benefit, meaning the 13% credit (An RDEC tax credit is worth 13% of your qualifying R&D expenditure) will be taxable, and only paid out net of tax.

There are seven steps (below) that must be followed in order when calculating an RDEC claim, and these will determine exactly how you receive your credit. The aim of these is to make sure that the credit is used to offset any tax you owe before any cash is paid out.

1. Discharge any liability to Corporation Tax for the accounting period
The gross RDEC rate (13%) is offset against your Corporation Tax liability for the period to which your R&D tax credit claim relates.

2. Adjustment to reduce to net of tax amount
To ensure that only the net amount of the credit is payable in cash, if the amount remaining after step 1 exceeds the net value of the credit (gross credit less Corporation Tax), the balance is withheld and carried forward for you to use in future periods.

3. Limit to PAYE/NIC of R&D staff
The payment of the cash credit is subject to a cap based on the PAYE and NIC paid to HMRC relating to the employees included in your RDEC claim. Amounts in excess of the cap can be carried forward for use in future periods.

4. Discharge Corporation Tax liability for any other accounting periods
Before the credit is paid in cash, HMRC may offset it against any outstanding Corporation Tax owed for any other accounting periods.

5. Elect whether to surrender for group relief
You are able to surrender up to the credit amount available at this step (as well as any amount restricted at step 2) to a group company to offset against their tax liability. But, you don’t have to do this; you can still receive a cash payment even if other companies in your group have tax liabilities.

6. Discharge any other liabilities of your company with HMRC
Any amounts remaining at this step will be offset by HMRC against other taxes if there are amounts outstanding. For example, overdue PAYE or VAT liabilities.

7. Cash credit payable to company
Finally, after the previous six steps, a cash credit is finally paid to the company. If you made it this far, then congratulations on getting through a rather dry topic, hopefully I have made things a little clearer regarding the benefit options for both SMEs and RDEC claims.

So, as you can see, the benefit depends upon numerous factors. So, next time someone asks how much their R&D tax relief claim is worth having only just met them, you can tell them it isn’t as straight forward as that, due to the many reasons explained above.

Get in touch or get your clients in touch to see how we can help:-  0330 223 1257

About author

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Ian Patrick
Tax Specialist