Since 1st April 2015 for every £1 of qualifying R&D expenditure, an additional £1.30 is allowed in the SME’s corporation tax computation as a “super deduction”. This means that the total tax relief equates to 230% of the actual R&D spend.
The current proposal, as announced at the 2018 budget, is that for accounting periods starting on or after 1st April 2020 the R&D tax credit will be capped at three times the loss-making company’s PAYE/NI bill for the accounting period. The proposal is that any excess losses must be carried forward and offset against future profits which may take considerable time.
A company has qualifying R&D expenditure of £8,000. As a result, it will be entitled to claim a tax deduction of £18,400 (£8,000 x 2.30). Assuming corporation tax on profits is paid at 19%, this will result in a tax saving of £3,496 – 43.7% of the R&D spend.
The SME in this example should be able to claim a cash payment, known as an R&D tax credit, instead. There’s currently no limit to the amount that can be claimed and since 1st April 2014 the rate of tax credit is 14.5% of the surrendaible loss.
A loss making company that has spent £8,000 on R&D could claim a tax credit of up to £2,668 (£8,000 x 2.30 x 14.5%), equivalent to 33.35% of the R&D spend.
A company spends £100,000 on R&D in 2022. The SME R&D relief increases its loss by £130,000 so, under the current rules, the company is able to surrender the £230,000 loss for a 14.5% payable tax credit of £33,350 (equal to £100,000 R&D spend x 33.35%). However, in the same accounting period, the company has a PAYE/NI bull of £5,000 as most of its staff are subcontractors.
In the absence of any minimum threshold, the maximum repayable tax credit would be £5,000 x 3 = £15,000. This is equivalent to surrendering losses of £103,448 (£103,448 x 14.5% = £15,000). The company would be able to carry forward the remaining £126,552 against future profits. It is possible that the company may also be able to surrender some of that carried forward loss for a payable tax credit.