Company with trading loss - SME & RDEC scheme

Small company with adjusted trading loss using both SME & RDEC schemes

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Hi,

I need a clarification about how to treat the losses for a small company for tax credits payable from SME scheme.  The company is a R&D intensive one and can claim 14.5% as payable tax credit from the SME scheme.  I understand that the SME Scheme benefit is below the line i.e. it is deductible for corporation tax purposes.  But it gets a bit complicated because the company also has a RDEC scheme for the notified state aid projects.  As you know RDEC is a above the line scheme which means it is treated as an taxable income for corporation tax purposes.

Now the query is, when arriving at the adjusted loss for the SME scheme should the loss be adjusted with the R&D expenditure credit arising from RDEC or should it calculate as an company operating an SME scheme for the SME tax credit and calculate the RDEC separately as per the rules for RDEC tax credit.

For example if the Tax Adjusted Loss is £5,00,000 and the RDEC scheme has a R&D expenditure credit of £65,000 should the SME scheme payable tax credit be calculated as £5,00,000 - £65,000 = £435,000. So SME tax credit payable @ 14.5% of £435,000 = £63,075 OR

should the calculation be £5,00,000 x 14.5% = £72,500

Should the company adjust the RDEC R&D expenditure credit or not for the SME tax credit payable?

I look forward to your answers and thanks in advance for any pointers.

 

Replies (12)

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By D V Fields
28th May 2024 19:51

Are you saying you have two research and development projects, one of which is being claimed under SME and the other under RDEC?

Both I believe are classified as state aid. Need to understand exactly what is happening to be able to offer any thoughts or pointers.

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Replying to D V Fields:
By autumnleaf
29th May 2024 11:51

Hi D V Fields,

Yes, there are two schemes being used by the company, SME for the Non-State Aid projects and RDEC for the state aid projects.

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Replying to autumnleaf:
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By D V Fields
29th May 2024 23:14

Haven’t come across the situation where both are being claimed but can see that it is permissible.

In respect of the Above The Line expenditure tax credit received I cannot see anything that suggest this is in anyway ringfenced (as with Video Games) therefore as others are suggesting this would be taken into account in assessing the unrelieved tax losses.

Therefore I believe your RDEC should be based purely on the eligible expenditure for that particular R&D project. Further the credit received (RDEC) would form part of the unrelieved losses in assessing the amount of R&D tax credit available.
Remember that the loss that can be surrendered for the repayable tax credit is the lower of the enhanced qualifying R&D expenditure (purely of that project) and the unrelieved losses. Therefore the surrenderable loss would be the lower of the £435,000 and the enhanced qualifying R&D expenditure (value not stated).
Refer to CIRD90500 for specific rates for the year(s) in question. If the enhanced qualifying expenditure is lower than the £435,000 then the balance of the loss can be carried forward as normal.

The document found here might provide some useful information:
https://www.hmrc.gov.uk/gds/cird/attachments/rdsimpleguide.pdf

Good luck.

Thanks (1)
Replying to D V Fields:
By autumnleaf
30th May 2024 12:56

Hi D V,

My response to your comment below-

"Further the credit received (RDEC) would form part of the unrelieved losses in assessing the amount of R&D tax credit available".

I understand that the RDEC qualifying expenditure credit would be adjusted from the unrelieved losses - this would be for a purely RDEC scheme company which does not have both SME and RDEC schemes.

My confusion is relating the the SME Scheme tax credit payable - should be it based on the unrelieved losses adjusted with the RDEC qualifying expenditure credit or should it be based on the unrelieved losses without adjusting the RDEC side of things.

If it is based on the RDEC adjusted losses the amount that the company will get from the payable SME tax credit would be less as against the payable SME tax credit without adjusting the RDEC credit.

Had the company been a purely SME or purely RDEC it would have been simpler to understand. I have scoured resources from various sources from did not find an example of workings where a company has both SME and RDEC schemes.

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Replying to autumnleaf:
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By D V Fields
30th May 2024 20:37

As I see it if the total company profit was say £10,000 before adjustment and receipt of RDEC and then say £30,000 was receivable via RDEC you would have a sub total profit of £40,000. If the R&D eligible expenditure gave a further £60,000 the unrelieved loss would then be £20,000.

Thus the benefit of the RDEC has an impact on the potential repayable R&D tax credit through surrendering a loss. My reasoning is because I cannot find anything that suggests that the profit or loss from the RDEC project is in anyway ringfenced.
Might be worth checking the relevant legislation to see if it is anything other than silent on the matter.

By contrast if you had a further video games project claiming video games tax relief then its profit and loss would be ringfenced from any R&D SME calculation.

Hope that helps otherwise I may not be fully understanding your question.

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By Ruddles
28th May 2024 21:30

Not had to consider it before but I’d say the surrenderable loss is the lower figure. But are you certain that the loss is surrenderable in full, ie the enhanced SME expenditure is at least £435k?

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Replying to Ruddles:
By autumnleaf
29th May 2024 11:59

Hi Ruddles,

I understand that the surrenderable loss is the lower figure, no queries with that. The confusion is whether to treat the company as pure SME for the SME scheme and pure Large company for the RDEC scheme because what is happening here is the tax credit arising from the RDEC scheme is being reduced from the adjusted loss and the remaining amount that is derived is the amount on which the SME scheme tax credit @ 14.5% is getting paid. This is resulting in a lower tax credit.

For example if the RDEC tax credit arising is £35k, this £35k is being deducted from the Adjusted loss of £435k and the SME tax credit is being calculated on the resulting amount of £400k. So tax credit arising from the SME scheme is £400k x 14.5% = £58k. Is this correct?

Or should the calculation for SME tax credit be straight away on the Adjusted Loss figure of £435k i.e. calculated as 14.5% of £435k = £63,075.

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By Dib
29th May 2024 13:07

You start with the loss before tax which would include the ATL credit if the accounts were adjusted for it. As they appear not to have been (and most aren't TBH), you put the ATL credit through as an adjustment in the tax computation to reduce the loss. You then put the enhanced SME deduction through and that gives you your loss for tax to compare to the appropriate percentage of the SME expenditure (I assume this is 186%). Take the lower loss and apply the tax credit rate of 14.5% (from your question) to it. Also claim the RDEC net of any step 2 amount.

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Replying to Dib:
By Ruddles
29th May 2024 13:34

Spot on

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Replying to Dib:
By autumnleaf
29th May 2024 14:17

So as per what you are saying if I put it in figures it would look like this -

1) Loss before tax - Loss minus ATL credit - £435k - £35k = £400k
2) Enhanced SME Deduction - £600k
Lower of the two is £400k on which 14.5% is payable = £58k.

RDEC is payable at 13% and 20% due to straddling of the financial year after the notional corporation tax restriction.

So this is the correct approach you mean?

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Replying to autumnleaf:
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By Dib
30th May 2024 13:11

Yes

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Replying to Dib:
By autumnleaf
30th May 2024 13:13

Thanks Dib for confirming this - huge help!

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