How does it work?

Here is a worked example of how a company gets its money

Background information

W Ltd has the following expenditure on its only R&D project for an accounting period:

Item Amount
Staffing costs £150,000
Payments to unconnected subcontractors £80,000
Payment to a connected staff supplier £70,000
Payments for use of patents £25,000
  • The R&D qualifies within the DTI guidelines and is relevant to the trade.
  • W Ltd is an SME and carried out the project on its own account.
  • Any intellectual property arising from the project is owned by W Ltd.
  • W Ltd received no subsidies or grants in respect of the project.
  • The project is such that the expenditure is not capital for tax purposes and is deductible in computing the company’s profit or loss.

The company had an allowable trading loss before the R&D claim of £179,000. Also the company had paid the PAYE and NIC liabilities for payment periods ending in the accounting period of £40,000 which arose in respect of both R&D staff and other staff.

Working out the company's enhanced R&D tax relief

The R&D expenditure qualifying for enhanced relief is:

  • 100% of the staffing costs for R&D staff that were paid in the period (so long as they were 100% engaged on R&D, otherwise their costs will need to be apportioned).
  • 65% of the payments to unconnected subcontractors.
  • Because the staff supplier is connected to W Ltd the qualifying expenditure is the lesser of the amount paid by W Ltd and the relevant costs of the staff supplier. The connected staff supplier's relevant expenditure on salaries for the staff supplied was £40,000.

The payments for use of patents does not qualify for enhanced relief because it does not fall within the types of qualifying costs.

So the qualifying expenditure is:

Item Amount
Staffing costs £150,000
Subcontract costs £52,000
(£80,000 x 65%)
Staff supplier costs £40,000
(£70,000 limited to cost)
Total £242,000

This means the company can claim an extra deduction of £121,000 (£242,000 x 50%) increasing the allowable trading loss for the period from £179,000 to £300,000 (£179,000 + £121,000).

Using the enhanced losses and working out the payable tax credit

The company can surrender part of its £300,000 trading loss in return for a payable credit.

W Ltd has funds on deposit which yield £20,000 of interest, but no other taxable income.

The first step in establishing the amount of the payable tax credit is to work out the surrenderable loss. The amount of the surrenderable loss is the lesser of:

  • the amount of the trading loss sustained in that period that has not been otherwise relieved or surrendered or could be relieved against other profits of the same accounting period, £280,000 (£300,000 - £20,000 of interest income against which the losses can be relieved), and
  • 150% of the qualifying R&D expenditure, £363,000 (£242,000 + £121,000).

Therefore, the amount of the surrenderable loss is £280,000.

The 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, and
    (in this case £44,800, i.e. 16% of £280,000)
  • the company's PAYE and NIC liabilities for payment periods ending in that accounting period
    (in this case £40,000, as stated in the background information above).

This means the company can claim a payable tax credit in cash from HMRC of £40,000.

First £20,000 of losses are used against other income (interest in this case). In order to claim the payable credit, losses of £250,000 are surrendered (£40,000 divided by the 16% payable credit rate). From the company's total £300,000 of losses, this leaves £30,000 of losses to be carried forward to relieve against future profits.