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HMRC internal manual

Corporate Intangibles Research and Development Manual

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HM Revenue & Customs
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R&D tax relief: SME scheme: payable tax credit - for surrenderable loss

CTA09/Ss1054 - 1057

An SME may claim a payable R&D tax credit for an accounting period in which it has a surrenderable loss. The claim must be made in a return or an amendment to a return on or before the first anniversary of the filing date for the accounting period - FA98/SCH18/PARA83E (1).

An R&D tax credit is not taxable income of the company.

Going concern (S1057)

A company may only make a claim under section 1054 at a time when it is a going concern. See CIRD81130.

Surrenderable loss (S1055)

A company has a surrenderable loss if in an accounting period the company:

  • obtains an additional deduction under section 1044 in calculating the profits of a trade and it makes a trading loss in that period in the trade, or
  • it is treated as making a trading loss under section 1045.
 
  • For expenditure incurred on or before 31 July 2008 the amount of the surrenderable loss is the lesser of: * the amount of the unrelieved trading loss sustained in that period;
  • 150% of the related qualifying R&D expenditure.    
         
      * For expenditure incurred on or after 1 August 2008 the amount of the surrenderable loss is the lesser of: * the amount of the unrelieved trading loss sustained in that period;
  • 175% of the related qualifying R&D expenditure    
      * For expenditure incurred on or after 1 April 2011 the amount of the surrenderable loss is the lesser of: * the amount of the unrelieved trading loss sustained in that period;
  • 200% of the related qualifying R&D expenditure.    
      * For expenditure incurred on or after 1 April 2012 the amount of the surrenderable loss is the lesser of: * the amount of the unrelieved trading loss sustained in that period;
  • 225% of the related qualifying R&D expenditure.
* 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;
* 230% of the related qualifying R&D expenditure.  
   

 

Unrelieved trading loss (S1056)

The amount of the unrelieved trading loss is the amount of the trading loss less the aggregate of:

  • any relief that was, or could be obtained by making a claim to set the loss against profits of the same accounting period under ICTA88/S393A (1)(a),
  • any other relief obtained in respect of the loss,
  • any amount surrendered to group or consortium members.

Amount of payable tax credit (S1058)

For expenditure incurred on or before 31 July 2008 amount of payable tax credit that a company is entitled to for an accounting period is the lesser of:

  • 16% of the surrenderable loss for that period;
  • the company’s PAYE and NIC liabilities for payment periods ending in that accounting period.

For expenditure incurred on or after 1 August 2008 the amount of payable tax credit that a company is entitled to for an accounting period is the lesser of:

  • 14% of the surrenderable loss for that period;
  • The company’s PAYE and NIC liabilities for the payment periods ending in that accounting period.

For expenditure incurred on or after 1 April 2011 the amount of payable tax credit that a company is entitled to for an accounting period is the lesser of:

  • 12.5% of the surrenderable loss for that period;
  • The company’s PAYE and NIC liabilities for the payment periods ending in that accounting period.

For expenditure incurred on or after 1 April 2012 the amount of payable tax credit that a company is entitled to for an accounting period is;

  • 11% of the surrenderable loss for that period;

For expenditure incurred on or after 1 April 2014 the amount of payable tax credit that a company is entitled to for an accounting period is;

  • 14.5% of the surrenderable loss for that period;

 

It is only the PAYE and NIC liabilities for the period in which the expense is deductible in calculating the taxable profit (CIRD81450) that are taken into account in working out the amount of any payable credit resulting from that expenditure.

The PAYE and NIC liabilities taken into account are those in respect of its own employees (CIRD83000).

The PAYE/NIC restriction has however been removed for accounting periods ending on or after 1 April 2012.

Calculation of the payable tax credit for accounting periods spanning 1 August 2008 For accounting periods spanning 1 August 2008 the calculation of the surrenderable loss and the amount of payable tax credit will be more complicated. The first step is to split the qualifying R&D expenditure, on the basis of when it was incurred, between the pre and post 1 August 2008 periods (income, and all other expenditure for the accounting period should not be split). The next step is to apply the relevant rates of enhancement (50% or 75%) to the pre and post 1 August expenditure.

The tax profit / loss for the whole accounting period is then calculated, taking into account only the enhanced qualifying R&D expenditure incurred before 1 August (but taking account of all income and any non-R&D expenditure for the period as a whole) - Any surrenderable loss arising as a result of this will be surrenderable at the 16% rate. Then the enhanced qualifying R&D expenditure incurred on or after 1 August should be taken into account. Any additional loss arising will be surrenderable at the 14% rate.

This two stage calculation is shown by the example below:

For the accounting period ended 31 December 2008 Company A’s pre 1 August 2008 qualifying expenditure was £30,000 which after 50% enhancement resulted in an R&D deduction of £45,000.

The company’s post 1 August 2008 expenditure was £20,000 which after 75% enhancement resulted in an R&D deduction of £35,000.

The company’s taxable profits for the AP, before R&D relief, were £30,000. The enhanced R&D expenditure to 1 August 2008 when deducted from the taxable income gave rise to a taxable loss of £15,000 which the company could choose to surrender at a rate of 16%, subject of course to it having sufficient PAYE & NIC liabilities.

The company’s post 1 August 2008 expenditure would increase the taxable loss for the accounting period by £35,000 and this part of the loss would be available to surrender for a payable credit, subject to sufficient PAYE and NIC liabilities, at a rate of 14%.

The principle remains the same for accounting periods spanning 1 April 2011.