If you are new to the R&D tax credit claim process, it’s important to understand the ways in which your business can benefit from the regime. Here, we investigate the guidance around carrying forward a claim for businesses that fall under the SME regime.
The SME regime
To recap, companies that fall under the SME regime for R&D purposes must have fewer than 500 employees and an annual turnover of less than €100 million or a balance sheet of under €86 million. In addition, no more than 25% of their share capital or voting rights can be held by another entity; if they are, the claim will fall under the Large Company regime.
Tax benefits of an R&D claim
An R&D claim under the SME regime reduces an organisation’s taxable profits or increases its taxable losses. In effect, the company can reduce its profits, decrease profits to make a loss, or increase pre-tax losses in order to benefit..
A successful claim results in relief in the form of either:
- A payable cash credit
- A Corporation Tax rebate
- An enhanced tax losses that can be carried back one year or forward against profits.
R&D credit carry forward
If your business is loss making, there are two options: either surrender your tax relief for an immediate repayment or carry the loss back one year or forward indefinitely. Companies that are profitable can also have tax losses when the enhanced rate of relief is applied. Let’s look at an example whereby the business has a taxable profit of £20,000 and a qualifying R&D expenditure of £50,000:
£50,000 x 130% = a further £65,000 deduction
£20,000 – £65,000 = £45,000 loss
The total loss is attributable to the tax relief, so the R&D tax credit claim would either be a payable credit of £6,525 (£45,000 x 14.5%) or a loss carried back / forward to offset against the profit. At a Corporation Tax rate of 19%, the loss relief could be up to £8,550 (£45,000 x 19%).
As always, when making an R&D claim, employing the services of a specialist tax advisor will reduce the chances of a mistake occurring. R&D Tax Solutions in Manchester can advise businesses in a range of sectors – from manufacturing to aviation– on their eligibility for R&D tax credits and whether they are able to carry forward their credits. Contact us today on 0161 298 1010 for details.