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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.