Despite the name, when we start a conversation with prospective clients about R&D tax credits the response tends to be ‘ears prick up’ rather than ‘eyes glaze over.’

Some have never heard of this opportunity to get some cash back from the Government and are keen to know just what is R&D tax credit, while others have been told by their advisers that they will not qualify.

Two of the initial questions that are understandably fired back to us are “What is R and D tax credit?” and “How exactly will it benefit me?”

Help with R&D Tax Credits

Well, rather than getting bogged down in processes and rates, here we will help you with R&D tax credits by sketching out what the end result of making an R&D tax credit claim is: what an R&D tax credit actually looks like.

The answer will depend on your circumstances, but there are five possibilities:

1. A cash rebate

R&D tax credits can be claimed retrospectively over 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

This is what you get if you make the claim in the same year that you file your corporation tax return. OK, so maybe it’s not quite as gratifying as receiving a ‘fat cheque’, but on paper it is worth exactly the same: up to 25p for every £1 spent on R&D (where you’re paying corporation tax at 20%).

3. Carrying forward or carrying back a loss

For a loss making company you can elect to carry back the R&D enhanced loss to the prior year, if profitable, or alternatively carry it forward and offset it against future profits.  If cash flow is not such a concern this option will often deliver better value, compared to the cash credit (see below).  However, cash in your pocket now is often difficult to ignore where future profitability is unknown.

4. A cash credit

This is the alternative for a loss making company.  Obviously there is no corporation tax to be reclaimed in this scenario but 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 24.75p for every £1 spent on R&D.

5. A ‘hybrid’ claim

Where a company’s taxable profit becomes a loss due to the extent of the R&D claim, the company is able to reclaim the corporation tax paid (pt.1) or make a corporation tax saving (pt.2) and also utilise the losses by carrying back or forward to offset against profits (pt.3) or claim a cash credit in return for surrendering those losses (pt.4).  The hybrid claim offers lots of flexibility and analysis should be undertaken to establish the best way forward.

In a snapshot this is what an R&D tax credit could look like, so it is worth investigating whether you could qualify and what is the best route for you.

Finally, remember, an R&D tax credit is not treated as taxable income. For more information contact us today and speak to one of our specialist R&D tax advisers.