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R&D Relief - Surrenderable Loss Definition

How does trading loss restriction interact with surrenderable losses

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We are a limited company and SME (first year trading) who are claiming R&D tax relief for y/e 31st March 2018, preferable paid as cash.

  1. Our qualifying spend is £219K, so grossed up by 230% gives £504K enhanced expenditure.
  2. Our trading loss is £227K.

Am I correct in thinking that means our surrenderable loss is restricted to £227K and therefore we can claim a repayment of  a maximum of 14.5% of this amount so £33K, rather than £504K x 14.5% = £73K?

https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-...

  • For expenditure incurred on or after 1 April 2015 the amount of the surrenderable loss is the lesser of:
  • the amount of the unrelieved trading loss sustained in that period; or
  • 230% of the related qualifying R&D expenditure.

All confirmations/corrections much appreciated.

Kind regards

Ben

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26th Jul 2018 14:26

If your loss is £227k after deducting the R&D enhanced expenditure (£504k), then you can only get a tax repayment based on surrendering the net £227k loss (i.e. £33k - 14.5% of £227k).

Thanks (1)
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By 1146ben
to alan.rolfe
26th Jul 2018 14:46

Net loss is £227K after deducting the expenditure at 100% only (not 230%). I think I therefore also need to deduct another 130% (for the enhanced element) as well to get the correct figure.

Thanks for the steer.

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By Ruddles
26th Jul 2018 14:54

Here’s another steer - appoint an accountant. Anyone with that level of R&D spend should have one

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12th Mar 2019 12:00

I am trying to get my head around R&D tax relief properly in order to be sure about an answer to Ben's question, which has great relevance to my future endeavors as well - please correct me if I am wrong:

As far as I understand the basic idea behind R&D tax relief is a deal with the HMRC of the following kind:

The HMRC pays a company 14.5% of an amount "A" NOW, if, in return, the company accepts its future taxable profit to be increased by that same amount "A", at which point the HMRC will get 20% of "A" paid back in form of corporation tax - so, in a sense, the HMRC makes a gain of 5.5% of "A" - BUT only if and when the company makes a profit.

This deal is a win-win for both the company and the HMRC as it helps the company to mitigate the financial risk of doing R&D at the moment and it helps the HMRC by potentially increasing tax payments in the future, in case the R&D pays off.

In other words R&D relief isn't the proverbial free lunch (which is impossible) because the company is forced to increase its future taxable profit by "surrendering" a part "A" of its overall loss, i.e. by accepting that that loss cannot be used in the future anymore to reduce taxable profit.

Now the answer to how high the "surrenderable" part of the overall losses of the company can be in a given year: It simply seems to be: 230% of the R&D expenses. BUT what happens if there isn't that much loss available? Well then just all the loss available becomes "surrenderable", which in this case is less than 230% of the R&D expenses, but this isn't really a restriction, because ALL the loss can be surrendered in this case.

Now it seems Ben's total loss for the year was 227K and it seems the main reason his company incurred that loss was because it had 219K R&D expenses. So here we have the case where the whole loss becomes surrenderable.

If Ben had had even more loss, due to expenses unrelated to R&D, like maintenance, depreciation, travel, whatever, then this loss could also be surrendered, but only up to a limit of 504K - if Ben had even more loss than that, he could not surrender the amount beyond the limit, so that amount would remain as loss in the accounts of the company, which can be put against income to reduce taxable profit, when eventually money comes in.

What is important however is that Ben cannot surrender MORE loss than there is, as that wouldn't be a win-win deal with the HMRC anymore.

I would be very grateful for any comments/criticisms of my attempt to make sense of it all.

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to SunnySpring
12th Mar 2019 12:54

Ben advised that the loss before deduction of enhancement was £227k. So his loss, including the enhancement, would be £512k. He could surrender up to the lower of that amount and the enhanced expenditure, in this case anything up to £504k.

Otherwise I mostly agree with your analysis - the company has a simple choice to make:

Does it want an immediate boost to its coffers or wait for a reduced tax bill later? The later tax saving may be greater but one has to consider the risk of it never materialising. That is why most companies, in my experience, take the "Bird in the hand" approach.

For the avoidance of doubt, the decision on whether or not to surrender is entirely a matter for the company. Your words "the company is forced to increase its future taxable profit by "surrendering" a part "A" of its overall loss" would (incorrectly) suggest otherwise.

Oops - just realised that I'm guilty of adding to an old thread!

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13th Mar 2019 12:00

Thanks Wilson, glad to hear you agree. I have one quibble left however: The statement "So his loss, including the enhancement, would be £512k." This is actually the thing which confused me initially. I realize now it leads to the same result in the calculation for the surrenderable loss, but it was confusing to me because it suggests Ben can just add a hypothetical extra amount to his actual loss and then one could get confused thinking that the companies overall loss for the year is then noted as this hypothetical "enhanced" loss of 512K. This can obviously not be the case! He can't just make up more loss than there is, right? This hypothetical loss number, 512K, can't mean anything and is just used in the calculation to see how much of the actual loss can be surrendered and after that its not used anywhere else, i.e. its nothing to do with the actual loss noted in the accounts of the company for that year. Am I right?

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to SunnySpring
13th Mar 2019 12:20

I don't really understand your point. Tax losses (or profits) are very rarely the same as the accounts figure. An R&D claim is just one of the many adjustments that may be made.

I would say that the £512k loss is anything but hypothetical - it is a very real tax loss. To the extent that it is not surrendered it can be used for other purposes - carry back, carry forward and so on.

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13th Mar 2019 20:19

You are right taxable loss can be very different from real loss, agreed.

However in Bens case - he will surrender all his Loss, i.e. all the 227K and as a result will have zero Loss left to write forward to possibly use against taxable income in the future, all his loss has been surrendered, so nothing is left for tax purposes.

I now believe that what Ben suggests in his second post, i.e. that he wants to add another 130% of the expenditure to his Loss for some reason, i.e. do the 227K+1.3*219K=512K calculation, doesn't make any sense at all.

The surrenderable part of the trade losses is 230% of the R&D Expense or just the whole of the trade losses, if they are less than 230% of the R&D Expense. Nowhere in that calculation do you add an extra 130% to the trade losses.If so, explain why you would need to ?

On the following website there is an example with simpler figures:
https://www.accaglobal.com/uk/en/technical-activities/technical-resource...

In that example the R&D expense is 60K, so no more than 230%*60K=138K of Loss can be surrendered. The Loss the company actually has is 200K, but it can only surrender 138K of it, in return for getting its 138K*14.5% in cash. The rest, i.e. the "unsurrendered" Loss of 200K-138K=62K, is what it can still use to reduce taxable income in the future, so this is all it can write forward in terms of tax.

At no point in the example do they add another 130% of the R&D expenses to the actual Loss. So that must be just a confusion - Agreed?

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to SunnySpring
13th Mar 2019 20:58

Duplicate

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to SunnySpring
13th Mar 2019 21:09

This will be my last attempt at explaining this

I appreciate that your confusion may be in part due to the incorrect information initially given by Ben.

The loss before R&D relief was £227k. The R&D claim increases that loss to £512k. That is a real tax loss and Ben can do with it as he chooses - set it against other profits, carry it back or carry it forward. Stop fixating on the £227k figure - the tax loss is £512k

In addition to or instead of the above treatments Ben can also surrender the loss , but only up to £504k. Any part of the £512k that is not surrendered (which part must be at least £8k) is available to be used for any of the other treatments above.

Unfortunately the example that you refer to doesn’t make it clear that the £200k loss includes the additional £78k R&D enhancement. In other words, the ‘actual’ loss in that example must be £122k - the equivalent of Ben’s £227k.

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By 1146ben
14th Mar 2019 09:54

If I can provide how I concluded this in my situation last year:

Although both our external accountant and I are both chartered and have dealt with R&D before, the specifics of our situation this year were new to us and the sum involved significant for us.

I paid for some advice by the hour for an R&D specialist to check some specifics on our claim including this point. I would recommend given the sums involved that if unsure, anyone in the same situation does the same thing.

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15th Mar 2019 13:04

Wilson: Thanks for your clarification. As you said I was mislead by the (incomplete) example on the website I gave earlier. I found a more comprehensive example on page 208 of this doc:

http://www.tolleytaxtutor.co.uk/taxtutor/files/subscriber/business-tax/c...

Here the trading loss is 170K and it explicitly says that this is loss "after relief for R&D expenditure". Given that on page 201 "R&D relief" means the subtraction of the extra 130% of R&D Expenses from taxable profit, "loss after relief for R&D expenditure" almost certainly must mean the addition of 130% of R&D expenses to tax-relevant losses.

This is good news and it means that my first analysis was wrong: It's not a win-win between companies and HMRC: The HMRC does loose tax under this system, as it allows companies to have less profit or more loss for tax purposes, than their actual profit or loss.

In the loss making case there is the additional option to "surrender" that extra loss in return for cash, which lessens the relief somewhat, but as you said earlier the "bird in the hand" advantage of having cash now, rather than extra tax reduction on profit later can be worth it.

Ok understood this now. Thanks again.

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