Nothing has been decided yet. But there are a lot of rumours around potential tax rises to pay for the impact of the Covid 19 support measures the government has implemented. One of these rumours is around an increase in Corporation Tax (CT) to 24% from the current 19%.
I am not going to look at the economic and political side. But I am going to look purely at the impact on decisions around Small and Medium Enterprise (SME) R&D Tax Credits or Relief claims.
Profitable company’s already claiming R&D Tax Relief.
For each additional £100k R&D deduction a company will save £24k rather than the current £19k of corporation tax. But any profits not relieved will attract the higher 24% corporation tax rate. So profitable companies with profits remaining after eligible R&D deductions will lose out and pay more tax. One mitigation strategy would be to make sure you are claiming what you are entitled to in terms of R&D Tax Relief because that relief will be more valuable. Talk to us today to arrange a free assessment. Claimants without experienced professional advice often underclaim or claim incorrectly.
Company’s making a loss after the R&D deduction.
If an SME has a loss after the R&D additional deduction it can claim an R&D Tax Credit. The tax credit cash payment is calculated at 14.5% of the loss surrendered (there is a limit on the amount of the loss that can be surrendered which is set at R&D costs x 230%).
At face value R&D Tax Credits paid on a loss are unaffected. But the key concept is surrendering a loss for an R&D Tax Credit. Taking an R&D Tax Credit cash payment is an option. At present surrendering a qualifying loss of £100k brings in, at the 14.5% tax credit rate, £14,500 of cash. If instead of taking a tax credit you can gain tax relief by carrying a loss forward or backwards you get 19% tax relief which is worth £19,000 (i.e. £4,500 more). This always requires a judgment call if you are carrying forward and are forecasting profits. “Do you take the money now or carry forward losses which may be worth more later?”. Thus at present the difference is between 14.5% or 19% so tax relief is worth about one third more than taking a tax credit against a loss. If the CT rate increases to 24% then tax relief will be worth almost two thirds more. This level of difference in value is quite significant. If CT does rise and if you believe your company will be profitable in the future, then surrendering a loss to take the R&D cash credit suddenly is quite a lot more expensive.
You should always carefully consider a decision on whether to take an R&D Tax Credit cash payment rather than carry forward the loss. If the CT rate goes up that weighs more on the decision.
Professionals Tip: the options on the tax side of R&D claims are important.
You can amend a tax return within 2 years of the accounting period end in which the R&D expenditure is incurred. This makes it possible to decide to take an R&D Tax Credit soon after an accounting period end and reverse it later to offset tax instead. If you are due an R&D Tax Credit cash payment you should always file as soon as possible from a cashflow perspective. Then if your company’s profitability changes in subsequent periods, or your projections for future years’ change, or your cashflow position changes, you can within the two years reverse your decision to take the cash payment. An amendment can be made in either direction, to release a tax credit cash payment or get the higher value tax relief, if you later find you have a profit that can be offset.
Another option would be to hedge the decision. You can surrender any part of your loss for a R&D Tax Credit up the maximum limit. So suppose £100k of losses was available to surrender for a cash payment, you could split that any way you wanted and take the R&D Tax Credit on part and carry the rest forward for tax relief. For example £50k surrendered for a credit and £50k carried forward for tax relief.
To throw in another variable. Carrying losses backwards for tax relief has always been worth more than an R&D Tax Credit cash payment. That position will remain. But if CT rises to 24% then it may make sense to stop carrying losses backward to get tax relief at 19% and instead carry them forward, as they can attract the higher rate 24% tax relief.
Conclusion
If corporation tax rates rise the smart money may not be on taking the R&D Tax Credit cash payment, the tax relief available on carried forward losses will be significantly more valuable. This should be considered carefully. A company does not have to take an available R&D Tax Credit. It is an option. Circumstances matter and should always be carefully considered. Therefore, it makes sense to talk to an R&D tax credits specialist.
Reference: Minister warns Rishi Sunak against tax hikes to cover Covid shortfall.