If you’re successful with an R&D claim, the next step – the best step for any company – is actually receiving the tax relief.
But how exactly does the process work?
Table of Contents
- How will I receive my R&D tax relief?
- SME tax relief scheme options
- Option 1: Cash rebate
- Option 2: Corporation Tax saving
- Option 3: Loss relief
- Option 4: Cash credit
- Option 5: Combination of the above
- RDEC tax credit scheme
- How to move forward with an R&D tax claim
How will I receive my R&D tax relief?
In short, it depends on which scheme you are using to make a claim, as well as your business’ financial position.
To some extent, it can depend on your preference. You might receive it as a cash payment, a reduction in corporation tax, a carry forward (or back) of an enhanced loss, or a combination of these.
For businesses using the small and medium enterprise (SME) R&D Tax Relief scheme:
Under the SME scheme, the R&D tax relief you receive reduces your taxable profits. If your business is loss-making, in some cases you can claim a payable cash credit, but this is not the only option.
There are actually five ways in which you could receive your benefit under this scheme, with the one most appropriate for your business depending on whether it is profit-making or loss-making.
Option 1: Cash rebate
If you make a claim for a period in which you have already settled your corporation tax, your company tax return is amended and HMRC will issue you with a repayment. R&D tax relief claims may be claimed retrospectively usually for the previous two accounting periods.
Option 2: Corporation Tax saving
If you make a R&D tax relief claim in the same year you file a corporation tax return, you could receive your relief in the form of a corporation tax saving.
Your business needs to be making a profit to reduce your corporation tax bill in this way. R&D relief claims can reduce or even eliminate corporation tax liability.
Option 3: Loss reliefs
If you are loss-making after your R&D tax credit claim, but were previously profitable, you can elect to carry back the R&D enhanced loss to the prior year.
Otherwise, you can carry it forward and offset it against future profits, or surrender it for group relief. Loss carry-backs and group relief can generate an immediate tax benefit as a corporation tax saving or a cash rebate.
Option 4: Cash credit
For a loss-making company this is another option. You can opt to receive a cash payment from HMRC, in exchange for the surrender of your R&D enhanced losses. This option is useful if your company needs to boost cash flow, and it can be worth up to 33p for every £1 spent on R&D.
Option 5: A combination of the above
If your taxable profit becomes a loss due to the R&D tax relief claim, you can reclaim the corporation tax you’ve paid already.
Or you could make a corporation tax saving and at the same time utilise the losses by carrying back or forwards against profits. Alternatively, you could claim a cash credit in return for surrendering those losses.
We’d recommend you seek expert advice to make sure that you select the best option for your specific situation.
For businesses using the research and development expenditure credit (RDEC) Tax Credit scheme:
The benefit you receive from RDEC is visible ‘above the line’ as income in your profit and loss statement. The credit is taxable income and reduces your corporation tax liability or, in certain circumstances, can be paid as a cash credit.
If you use the RDEC scheme, the effect of an R&D tax credit claim is different to the SME scheme.
There are seven RDEC steps that must be applied to determine how you will receive your credit. These seven steps ensure that before any cash is paid out, the credit is used to offset any tax you owe to HMRC.
The seven steps must be followed in order and, depending on your circumstances, may mean that some of your credit is carried forward to a later period before being used.
The RDEC calculation is one of the more complex areas of the R&D regime so it is important to find expert guidance.
How to move forward with an R&D tax claim
We have the expertise and experience to advise innovative companies on all aspects R&D tax credits to ensure that you maximise your benefit.
If you want to discuss any of these matters further, you can do so by calling 01204 41 42 43 or by emailing us via our Contact page.