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Blog: Tax Talk – Losses v Surrender for Cash Credits

Date: October 3, 2018

By Nigel Holmes, Senior Tax Specialist at Catax

R&D Tax Relief is often known as R&D Tax Credit, but did you know when it was first introduced the term “credit” only referred to the surrender of a tax loss cash repayment and not the entire scheme? In this Tax Talk, I look at the benefit options of the relief and how the loss surrender works in practice.

For profitable companies, the R&D tax relief reduces the company’s Corporation Tax liability. This will either result in a repayment where the tax has already been paid or reduce a future tax liability still to be paid.

Given how R&D tax relief works it can, of course, either turn a taxable profit into a tax loss or increase an existing tax loss further. This then leads to the client having to make a choice to use the loss or take a cash credit, hence R&D tax credit.

Firstly, to clarify the credit. It is not in any way a refund of tax already paid. So a start-up which has yet to pay over tax to HMRC of any kind could still receive a credit. It is a sum of cash, pure and simple.

The options:

The best option is always, where possible, to carry a loss back. A loss can only be carried back one year. This is the best option because:

Of course, many companies may not have a profit in the prior period to carry back a loss.

The next best option, if the company is a member of a group, is to group relieve the loss to a profitable fellow group member as this will save tax at 19%.

Thereafter, the choice arises.

A company can either:

Most companies opt for the cash, why?

Where does 14.5% come from? Who knows? It is the rate HMRC has set. There is no indication, as yet, of any change either post-Brexit or when the tax rate reduces to 17%.

Let’s wrap this up with an example.

Company has a £10,000 loss which already includes R&D qualifying costs of £20,000.

After the 130% uplift (£20,000 x 130% = £26,000) the tax loss is now £36,000.

The credit of 14.5% is based on the lower of:

The credit (cash) is £5,220 being 14.5% of £36,000 and the loss is surrendered, in other words, it cannot be used in any other way.

Same again, but the company has a £100,000 loss which already includes R&D qualifying costs of £20,000.

After the 130% uplift (£20,000 x 130% = £26,000) the tax loss is now £126,000.

The credit of 14.5% is based on the lower of:

The credit (cash) is £6,670 being 14.5% of £46,000 and £46,000 of the loss is surrendered, but £80,000 remains to be carried forward (£126,000 less £46,000 surrendered).

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