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How you might receive the benefit of your R&D tax credit relief claim will depend on several factors.
These factors include the tax profile of your company after taking into account the benefit of the enhanced R&D tax deduction.
Understanding your company's tax profile for R&D tax purposes
Whether your company is profitable or loss-making will have an important bearing on how you will receive the benefit of your R&D tax claim and how much you could receive
Profitable company: How will I receive my R&D tax credit relief?
As a profitable tax-paying company, how and when you will receive your R&D tax credit relief is a matter of timing. Timing of when the R&D tax claim is quantified.
Companies that have quantified their R&D tax claim within nine months of their relevant accounting period end can build the cash tax saving benefits of their R&D claim into their next corporation tax payment (due nine months after the accounting period end).
Whereas companies that have already paid the corporation tax due on an accounting period BEFORE taking into account the R&D tax benefits (perhaps because they were unaware of this relief or if it is a late claim) can claim a refund of corporation tax already paid from HMRC (equivalent to the R&D tax saving).
Timing impact of your R&D tax claim preparation on cash recovery
Loss-Making Company: How will I receive the benefit of my R&D tax credit claim?
If your company is loss-making in the period, you have a number of options as to how you could potentially benefit from the enhanced loss generated by the R&D tax relief.
These options may be summarised as follows:
You could elect to surrender this enhanced tax loss for a tax credit cash rebate from HMRC (calculated at a rate of 14.5%)
Or you could carry forward the enhanced tax loss carry to offset against future trading profits of the company and benefit from tax relief at a potential rate of 19% or 17% (depending on when the company becomes profitable).
Note that the effective tax savings rate is higher under this option than surrendering the enhanced R&D tax loss for a cash tax credit from HMRC (option 1)
Or you could elect to carry back the enhanced loss to offset against taxable profits in the previous 12 month accounting period (if such taxable profits are available)
If your company is part of a (75%) group, you could surrender the enhanced loss to a fellow group company as ‘group relief’
Ultimately the decision will depend on your particular facts.
The surrender of the enhanced tax loss for a tax credit from HMRC (option 1 above) is popular as:
- many are uncertain when they might reach profitability in the future (this can rule out option 2 above)
- many companies have no profits in the prior year (especially start-ups – so this rules out option 3 above)
- single companies have no option to surrender as a group relief (option 4)
Other factors to consider include:
- Cash demands in the short-medium term. You may be forecasting profits in the next year (so option 2 is a possibility) but you can’t benefit from the R&D tax savings until the liability for that year is due (typically nine months after the year end). Many will prefer to ‘bank the cash’ now
- Following on from the above point, if the same levels of qualifying R&D are forecast next year, will there be taxable profits in that year that need to be sheltered?
- Future time value of money when considering the added % tax relief available by carrying forward the enhanced losses (14.5% v 19/17%)
- Uncertainty regarding future tax rule changes
This is by no means as an exhaustive list but gives you a flavour of some of the factors that need to be considered. Every company’s facts are different, and this is where it can be helpful to engage qualified specialists to ensure that you are making your decision having considered all of the specific tax and financial implications.
How HMRC processes the R&D tax credit relief
HMRC does not write to you to inform you of your success in claiming R&D tax relief. Instead, HMRC will process your R&D claim, based on whichever option (or combination of options, as outlined above) you selected when filing it. Or in certain cases, they will open a formal enquiry.
HMRC aims to process R&D tax credit claims within 28 days of submission. Although in practice, companies should allow up to 60 days, given the recent increase in the volume of R&D tax credit applications submitted to the HMRC specialist R&D unit.
Don't forget to include your bank details in your CT600 tax return
Commonly overlooked, don’t forget to include your company bank details in the CT600 that includes the R&D tax relief claim.
This way HMRC can send the R&D tax rebate payment directly to your bank account. It normally takes 5-10 working days to clear from the date that HMRC process the rebate.
Research and Development Expenditure Credit (RDEC)
For large companies (or SMEs that are unable to claim the SME R&D tax relief due to grants, for example), the RDEC relief is applied and processed in a different way to the SME R&D relief. You can learn more about the RDEC here.
It is worth noting that, at the time of writing, there are significant delays in the processing times of HMRC in relation to the RDEC relief.
Do I need the help of R&D tax credit specialists?
Given the myriad of options that are available to companies in optimising the cash tax benefit from their R&D tax credit claim, it can be helpful to seek the assistance of qualified R&D tax specialists.
At IP Tax Solutions, we can provide end-to-end advice and assistance, including the preparation and filing of the relevant CT600 tax returns plus dealing with HMRC, as necessary.