R&D tax credits are paid as either:
- Cash credit or rebate from HMRC OR
- Reduction in corporation tax payable / paid OR
- Refund of prior period corporation tax OR
- Future corporation tax saving OR
- Surrender to a group company OR
- Combination of the above
The way in which you receive the benefit from the R&D tax credits scheme primarily depends on whether your company is profitable (tax-paying) or loss-making in the relevant accounting period.
Cash credit or rebate from HMRC
If your SME company has a tax loss after taking into account the enhanced R&D tax relief, then you can elect to surrender the enhanced tax loss in exchange for a R&D tax credit claim payment from HMRC.
This cash payment injection is calculated as 14.5% of either the total enhanced tax loss or enhanced qualifying costs for the period (at 230%), whichever is lower.
The payable tax credit is typically processed by HMRC within 4-6 weeks of submission (HMRC targets 28 days) is typically transferred directly into your company bank account (provided you have entered the company bank details into the CT600 tax return). Payment is usually processed within a further 5-7 working days so around 35 - 40 days in total - from submission to payment into your bank - for the majority of R&D tax credit claims.
It is worth noting that, although most loss-making companies elect to surrender the enhanced tax loss for the R&D tax credit payment from HMRC, a better rate of relief might be secured if the company could carry forward the R&D tax loss to offset against future taxable profits as this could secure relief at 25% v 14.5%.
Reduction in corporation tax payable / paid
Profitable companies can offset the enhanced R&D tax relief (notional uplift of 130% on eligible expenditure) against taxable profits in the period - this can help reduce the corporation tax liability otherwise payable or eliminate it completely.
If the R&D claim is filed and processed by HMRC before the due payment date (nine months after the accounting period end for most SMEs) then the reduced liability can be paid (taking into account the benefit of the tax relief claim).
Alternatively, if the claim is prepared and filed after the normal due payment date, then a corporation tax refund can be claimed from HMRC for the R&D tax relief savings.
Refund of prior period corporation tax
A company can elect to carry back the enhanced R&D tax loss to the previous accounting period to offset against taxable profits in the previous 12 months.This can secure tax relief at a rate of 19% (as opposed to 14.5%, if a tax credit payment is claimed) so this is generally the preferred course of action where the facts allow for such a claim (i.e. where there are taxable profits in the prior 12 month period followed by a tax loss in the next accounting period - whether caused by the enhanced R&D tax relief or not).
Future corporation tax saving
Rather than claim a cash tax credit claim from HMRC, a loss-making SME limited company can elect to carry forward the enhanced R&D tax loss to offset against future profits of the company.
This approach should secure a higher effective tax rate saving compared to claiming the payable R&D tax credit i.e. 14.5% under the tax credit election versus 19% - 25% under the loss carry forward option. This is of course subject to cashflow demands as there will be a time-delay before the cash benefit of the relief can be realised in the future.
Surrender to a group company
It is possible for a company that is part of a wider UK corporate group to surrender the enhanced R&D tax loss to a fellow qualifying group company as 'group relief'.
Combination of the above
It is technically possible for an innovative company to be profitable before taking into account the enhanced R&D relief and for the resulting SME tax relief to switch the tax profile of the company from taxable profits to a tax loss in an accounting period (note that this change in tax profile from profits to losses is a notional adjustment for tax purposes only as does not impact on the published profit profile of the company).
In this case, the enhanced relief will have sheltered any corporation tax otherwise payable.
The company then has a choice as to whether to carry the surplus enhanced loss back to offset against taxable profits in the prior 12 months (tax relief likely at 19%) or carry the loss forward to offset against future profits (tax relief likely at 19%-25%) or claim the cash credit (tax relief at 14.5%).