How much and over what time-frame you receive the cash tax benefit of your R&D tax credit claim will depend on a number of factors. These factors need to be considered to determine the best option for you.
Key factors impacting on how you receive your R&D tax credit
- What is your company’s tax profile? Is it profitable (tax-paying) or loss-making (non-tax-paying)?
- Are you part of a group with a parent / sister / subsidiary group companies?
- Do you foresee significant taxable profits, say in the next accounting period?
- Was there a taxable profit in your prior (12 month) accounting period?
- Does your current cash flow requirements indicate that you might benefit from receiving the R&D credit cash now?
- Does your claim fall within the SME R&D tax credit relief or the RDEC relief?
- Do you have any other outstanding tax liabilities?
- Have you included your company bank details in your CT600 tax return?
These are critical factors for you to consider to ensure that you are maximising your cash tax benefit from your R&D tax claim. These factors are considered further below.
Company Tax Profile – Taxable profits (R&D tax relief: reduction in corporation tax payable)
If your company has a taxable profit (after taking into account the enhanced R&D tax deduction), then it will benefit from a reduction in corporation tax paid or payable.
So if you file your R&D tax claim in advance of the corporation tax payment date (usually nine months after the end of the accounting period end), then you could benefit from the cash flow advantage of paying the lower amount from the outset.
If on the other hand, you are filing your R&D claim after you have already paid your corporation tax (based on the pre R&D claim taxable profit), then you should receive a refund of corporation tax overpaid. This refund is typically paid back within 4-6 weeks of filing.
Tax losses (R&D tax credit claimable or other tax loss planning)
Many companies (especially start-ups) find that the R&D tax enhancement increases their tax losses. Others might have taxable profits before considering the R&D tax super-deduction. But after deducting the R&D tax enhancement they might have a tax loss overall for the period.
Companies that have an enhanced R&D tax loss have the following choices to consider as to how they receive the R&D tax credit:
- Surrender for an R&D tax credit rebate from HMRC;
- Carry forward the increased tax loss to offset against its future trading taxable profits;
- Carry back to offset against taxable profits in the prior 12 month period (if available);
- Transfer the increased losses to another group company or companies to offset against their taxable profits (subject to ‘Group Relief’ requirements).
Each of the above scenarios would have differing effective tax rate savings.
For example, the first option of claiming the tax credit would have a cash tax benefit of 14.5%.
Whereas, the second option could have an effective tax cash benefit of 19% or 17%. This depends on when (or how soon) the losses can be used up.
The third and fourth options would likely have a 19% cash tax rate saving (if pre 1 April 2020).
A loss carryback claim would normally be more beneficial than a tax credit claim (19% v 14.5% benefit rates). But this would depend on the availability of taxable profits in your prior 12 month accounting period.
Similarly, if you anticipate that you will generate sufficient taxable profits in your next accounting period, then it might make sense to carry forward the losses. This option would generate a future cash tax saving at 19% (or potentially 17% post 1 April 2020). This compares to a cash tax credit of 14.5% now. Short-term cash flow needs would usually dictate this decision. As many companies need the R&D tax cash credit within 4-6 weeks.
The RDEC relief does not operate as an enhanced tax loss in the same way as the SME R&D tax relief. On this basis, there is less flexibility for loss planning. RDEC is covered in more detail here.
R&D Tax Credit: Any other outstanding tax liabilities
HMRC will not pay out an R&D tax credit to a company that has any other outstanding tax liabilities, e.g. VAT, PAYE etc.
This restriction makes sense, although it can be disconcerting for those companies that were banking on the R&D tax credit to settle other bills! If you have a ‘Time to Pay Arrangement‘ set up with HMRC (for any outstanding taxes), the R&D tax credit claim can be a useful way of reducing or eliminating any such arrears and ongoing such arrangements.
Easy to add into your claim filing documents, yet often overlooked! You have to prepare and file a CT600 that includes your R&D tax claim whether original or amended submissions.
So inserting your company bank details into your CT600 corporation tax return will help speed up any R&D tax refund or rebates. But make sure that you check the account and sort code entries carefully prior to submission.
As you can see, there are many factors to consider in helping navigate how you receive your R&D tax credit benefit. So this is why we recommend that you seek specialist advice to ensure that you are getting the maximum cash tax benefits out of your R&D tax claims.
Don’t forget that reviewing these factors for each accounting period is crucial.