Following an Research & Development (R&D) claim, companies are often in a position where they are left with unrelieved trading losses. These losses can either be carried back, where possible, carried forward or surrendered for a tax credit at a rate of 14.5% for the SME scheme.
We are often asked for advice on which benefit option will result in the highest tax saving. This will depend on a number of factors, including the needs of a particular business. Carrying losses back can result in cash repayments of any corporation tax paid in prior periods; therefore, this is often the first recommendation. When it isn’t possible to carry losses back, a tax credit can be useful if a company requires an immediate cash injection. However, if short term cash flow isn’t an issue, the option to carry losses forward can result in relief at a higher rate, as long as a company expects to be profitable in the foreseeable future.
Corporation Tax Rate Change
Before the rate change, carrying losses forward could result in tax relief at 19% when offset against profits in future periods. However, from 1 April 2023, the main rate of corporation tax rate is set to rise to 25%, affecting all companies with profits over £50,000. Therefore, there is now the potential to obtain tax relief at 25%.
It is important to note that this benefit will only be realised if your contact expects to be profitable in future years. If they plan on making further R&D claims, any future claims may also generate additional losses.
Small Profits Rate and Marginal Relief
The rise in the main rate of corporation tax does not affect most companies earning profits below £50,000. These companies will be subject to a new small profits rate of19%. However, companies with profits between £50,000 and £250,000 will be liable to corporation tax at 25%, but with marginal relief available. Therefore, they will still feel the impact of the rate change, but the effective rate will be increased gradually for companies with profits falling within these thresholds.Conclusion
Overall, it is now more important than ever to give serious consideration towards loss relief planning. Following an R&D claim, the choice for how your contact wishes to receive their benefit should depend on their particular business needs. It is important to consider both short term cash flow needs as well as forecasted profits for future years, as this will determine the rate of corporation tax that your business will be subject to.