Contributed by ACCA, in their own words
Small and medium-sized enterprises that make a loss stand to benefit from an increase in research and development tax credits.
The Chancellor announced an increase in the repayable research and development (R&D) tax credit for loss-making small and medium-sized enterprises (SMEs) from 11% to 14.5%. Since 2011 the tax credit movement had been downwards, so this reversal is good news for loss-making SMEs.
The R&D tax breaks have been subject to much revision in recent years. To recap, there are two distinct schemes for SMEs and large companies. To qualify as an SME for R&D purposes, the company must not exceed the following limits:
| Limits for expenditure incurred on or after 1 August 2008 | |
| Number of employees | < 500 |
| Annual turnover | ≤ EUR 100m |
| Balance sheet total | ≤ EUR 86m |
The levels of relief available for expenditure by SMEs on qualifying R&D are as follows:
Small or Medium-sized Enterprise (SME) Scheme
- Small and medium-sized companies can claim R&D tax relief for 225% of their qualifying revenue expenditure from 1 April 2012 on research and development expenditure. The relief would normally be claimed by deducting, from taxable profits in the company’s corporation tax computation, an additional amount equal to 125% (or 100% prior to 1 April 2012) of the R&D expenditure.
- Relief at 225% of the expenditure gives companies liable to pay the small profits rate of 20% a tax saving equal to 45% of the R&D expenditure.
- Where a company has a surrenderable trading loss, it may surrender the R&D tax relief (or the unrelieved loss if lower) in exchange for a tax credit equal to 11% of the surrendered amount. From 1 April 2014, this will be increased to 14.5% with effect from 1 April 2014.
The way that the tax credit relief operates is best given by example:
SME Ltd has the following results for the year ending 31 March 2015:
Trading loss £200,000
Qualifying R&D expenditure £ 60,000.
The surrenderable loss is the lower of:
- £200,000 and
- £60,000 x 225% = £135,000.
The repayable tax credit is therefore £135,000 x 14.5% = £19,575.
The trading loss of the company to carry forward is £200,000 – £135,000.