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R and D Tax relief if a profit

R and D cash back

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Please can someone who knows about these things help!

 

I have am working with a company that has brought forward loss of £55K. Before any R and D they made a profit of £75K. So for CT purposes they would have paid tax on £20K. However they have enhanced R and D costs at 230% of qualifying expenses of £850K. Our accountant says becasue there is a profit this year we can only carry the losses forward to future years. Our R and D guy says we can claim the 14.5% cash back from HMRC.

|Who is correct?

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Psycho
By Wilson Philips
06th Nov 2019 21:45

I can’t quantify the claim because it isn’t clear if the £850k is the actual R&D spend, the enhancement of 130% or the enhanced (230%) expenditure.

In any event, though, your accountant is wrong. You can surrender the lower of the loss, reflecting the additional deduction, and the enhanced R&D expenditure. Regardless of the uncertainty expressed in my first paragraph, it is clear that you will have a surrenderable loss for the year.

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By Tony1958
06th Nov 2019 22:11

Hello and thanks for the prompt reply. The qualifying R and D expenditure is £370K so 130% is £480K and 230% is the £850K. So is the loss the additional 130% (480K) less the £20K profit so £460K * 14.5% = £66.7K back from HMRC?

Thanks for your help.

Tony

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Replying to Tony1958:
Psycho
By Wilson Philips
06th Nov 2019 22:37

Not quite.

You calculate the tax-adjusted profit/loss before thinking about brought forward losses.

So your loss for the year will be £405k. Tax credit is therefore £58.725.

The loss of £55k is carried forward.

Are you sure that there hasn’t been a misunderstanding and that it was that loss that the accountant was referring to?

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By Tony1958
07th Nov 2019 00:21

Thank you very much I think I understand now.

I have another guy who has no carry forward losses but made a loss of £22K in the trading year. His qualifying R and D expenditure was £26K so 130% is £33.8K and 230% £59.8K.

Can he claim back 14.5% of the £33.8K or 14.5% of the £59.8K. Last question I promise and really appreciate your clear clarification of the first scenario.

Cheers

Tony

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Replying to Tony1958:
Psycho
By Wilson Philips
07th Nov 2019 14:00

Neither!

His adjusted loss will be £55.8k (££22k + £33.8k).

Surrenderable loss is lower of adjusted loss and enhanced R&D spend, so £55.8k. (Although, for completeness, he could choose to surrender less than that - if, for instance, there were some taxable profits in the previous or following year - see below.)

But if the company had taxable profits for the previous year it would probably be better to carry back the loss against those profits. (And/or indeed carry them forward if there was certainty of taxable profits in the following year.)

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