My company's tax return for 2016-17 is being amended for an R&D claim. I'm trying to understand if R&D tax credits can be applied to losses brought forward, or only to losses in the period?
Approx figures from tax return:
- Turnover: £300,000
- 2016-17 trading profit: £5,000
- Losses brought forward: £105,000
- Losses carried forward: £100,000
All R&D expenditure in the period was on an EU-funded H2020 project. It was 70% funded, which I understand means that 70% of expenditure can go on the RDEC scheme for a 11% tax credit, and 30% on the SME scheme which can receive a 14.5% tax credit.
- Total R&D spend: £200,000
- R&D H2020 funding (70%): £140,000
- R&D expenditure matched by company (30%): £60,000
This is what I understand:
- Under the RDEC scheme, we can claim 11% tax credit on £140,000 H2020 funding = £15,400
- Under the SME scheme, we can claim enhanced losses of 130% on £60,000 R&D expenditure = £78,000
Here's what I don't understand. Can the 14.5% SME tax credit be applied to the losses brought forward or only for the period? For example:
- EITHER: The enhanced loss (£78,000) added to the period's profit (£5,000) gives a period loss of £73,000. Total R&D expenditure of 230% is £138,000, but the tax credit is applied to the lower of the period's loss and the R&D expenditure. So 14.5% of £73,000.
- OR: With a period loss of £73,000 added to losses brought forward of £105,000, total losses are £178,000. Now the lower of £178,000 and £138,000 (230%) is £138,000, and so the 14.5% tax credit can be applied to that.
It's quite messy with the two schemes. But thanks in advance for any help!