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R&D Tax Credit - apply to losses brought forward?

Hi,

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!

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19th Dec 2018 18:41

Hi,

B/f losses for the purposes of R&D are disregarded.

The tax credit (14.5%) if SME, is based upon the lower of the loss (tax loss, not accounting loss) for the period, as extended by the additional 130% R&D revenue expenditure and the R&D expenditure (230%)

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By jombo
to RogueNation
19th Dec 2018 20:29

RogueNation wrote:

Hi,

B/f losses for the purposes of R&D are disregarded.

The tax credit (14.5%) if SME, is based upon the lower of the loss (tax loss, not accounting loss) for the period, as extended by the additional 130% R&D revenue expenditure and the R&D expenditure (230%)

Thanks. That clarifies the situation.

I think our accountants messed up with previous tax returns as most of the £100,000 losses brought forward are due to R&D and we were never given an option to claim the tax credits.

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19th Dec 2018 20:50

Hi,

My post refers to being able to claim the 14.5% tax credit.

If you don't surrender the loss, as per my initial post, you can carry the losses forward, you just can't use b/f losses when making a claim for the tax credit.

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06th Jan 2019 16:49

Hello, your methodology of split between RDEC and SME is correct but the R&D SME surrender only relates to current year losses enhanced by the uplift not brought forward losses. Regards, Nigel

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