R&D enhancement and surrender rates explained
Filing for R&D tax credits has never been a simple task, with the need to carefully document any relevant projects, as well as calculate the appropriate expenditure incurred. For those working alongside experienced R&D tax experts, the entire process is relatively straightforward; for those filling their own claim, it can be anything but.
There is the need to be fully aware of exactly what you can claim. While few companies are even aware of the existence of R&D tax credits, even fewer will be aware that loss-making companies are also able to benefit from the scheme. It is this which leads us to look at the enhancement and surrender rates you need to take into consideration during your calculations.
Enhancement rates
When calculating their claim, profitable businesses will first need to calculate their qualifying costs. This will often encompass expenditure such as staffing costs, pension and National Insurance contributions, and cost of materials. This amount is then ‘enhanced’, a process which increases the associated spend while at the same time reducing the taxable profit for your financial year.
The purpose of this enhancement is to reward businesses for the innovative research and development they conduct by reducing the corporation tax payable. The rate of the tax enhancement is dependent on the period for which you are making your R&D tax credit claim:
Period Enhancement rate
Before 31 March, 2011 175%
1 April 2011-31 March 2012 200%
1 April 2012-31 March 2015 225%
After 1 April 2015 230%
Of course, enhancing the spend can cause a tax loss. This is where ‘surrender’ rates come into effect.
Surrender rates
If you are subsequently found to be making a loss following the enhancement of your qualifying costs, HMRC introduced surrender rates in order to mitigate any losses. In effect, any loss generated by the scheme can be surrendered for cash. For those start-up companies that are struggling to make ends meet during a period of extensive R&D, an injection of cash may well make the difference between ceasing operations and continuing to work.
Period Surrender rate
Before 31 March 2011 14%
1 April 2011- 31 March 2012 12.5%
1 April 2012-31 March 2014 11%
1 April 2014-31 March 2015 14.5%
After 1 April 2015 14.5%
As you might expect, there are caveats to receiving the benefits of surrender rates, namely that only the amount of loss is able to be surrendered to a maximum of 230% of the R&D expenditure.
Find out more
The prospect of making a claim for R&D tax credits can be daunting, which is why the experienced team at R&D Tax Solutions in Manchester will be able to provide guidance and assistance throughout the process. Contact us today to learn more about enhancement and surrender rates, and for help in calculating the value of any R&D claim you might have.
