How you receive your R&D tax credit benefit is determined by which scheme you are using to make a claim, as well as your business’ financial position. To some extent, it also depends on your wishes. You might receive it as a cash payment, a Corporation Tax reduction, the carry forward or back of an enhanced loss or as a blend of these.
The form your R&D tax credit benefit takes varies depending on whether you are using the SME R&D tax credit scheme, or RDEC.
Under the SME scheme, the R&D tax credit you receive reduces your taxable profits. If you are loss-making, in some cases you can claim a cash credit. In contrast, the benefit you receive from RDEC is visible “above the line” as income in your accounts. The credit itself is taxable income and ultimately reduces your corporation tax liability or in certain circumstances can be paid as a cash credit.
How your R&D tax credit is paid if you use the SME R&D tax credit scheme
If you use the SME R&D tax credit scheme there are five possibilities for how you could receive your benefit. As you will see when we explain each one below, the one that is appropriate for you will depend on whether you were profit-making or loss-making. And in some circumstances, you have some choice as to how you receive your benefit.
1. A cash rebate
R&D tax credits can be claimed retrospectively for the previous two accounting periods. If you make a claim for a period in which you have already paid your corporation tax, your company tax return is amended and HMRC will issue you with a repayment.
2. A corporation tax saving
If you make your R&D tax credit claim in the same year that you file your corporation tax return, you might receive your R&D tax credit in the form of a corporation tax saving. To reduce your corporation tax bill in this way, you would need to be profit-making. Your R&D tax credit claim will then either reduce or eliminate your corporation tax liability.
3. Loss reliefs
If you are loss-making after your R&D tax credit claim, you can elect to carry back the R&D enhanced loss to the prior year if you were previously profitable. Alternatively, you can carry it forward and offset it against future profits, or surrender it for group relief. Loss carry-backs and group relief can generate an immediate tax benefit in the form of a cash rebate for tax paid or corporation tax saving.
For loss carry-forwards, if cash flow is not such a concern to you, this option will often deliver better value in the future, compared to a cash credit. However, an immediate cash injection is often difficult to ignore when your future profitability is an unknown.
4. A cash credit
This is the alternative for a loss-making company. You can choose to receive a cash payment from HMRC, in exchange for the surrender of your R&D enhanced losses. This option is useful for companies who need a boost to cash flow, and it can be worth up to 33p for every £1 spent on R&D.
5. A combination
Where your taxable profit becomes a loss due to the R&D tax credit claim, you can reclaim the corporation tax you’ve already paid (2). Or you could make a corporation tax saving (1) and also utilise the losses by carrying back or forward to offset against profits (3). Alternatively, you could claim a cash credit in return for surrendering those losses (4).
This option provides maximum flexibility. We’d recommend you undertake an analysis with an expert like ForrestBrown to establish the best way forward for your specific situation.
How you receive your R&D tax credit if you use RDEC
If you use the RDEC scheme, the effect of an R&D tax credit claim is different. A seven-step process is followed. This starts with paying any corporation tax liability for the current accounting period. Seven steps later, after the other options have been considered, a cash credit may be paid out. These seven steps are explained in further detail in our RDEC scheme explained article.
ForrestBrown’s technical firepower can help
As a firm of chartered tax advisers – the gold standard in tax – ForrestBrown is uniquely placed to advise innovative companies on R&D tax credits. And unlike other R&D consultancies, we are able to file Corporation Tax returns on behalf of our clients. Our end-to-end claim service takes care of all of this for you and ensures that your benefit is maximised.