If my business is profit-making for an accounting period, how is the claim benefit calculated?

SME Scheme

When your business is profit-making for an accounting period, it is liable to corporation tax based on the calculated taxable profit.

Once the qualifying Research and Development (R&D) expenditure has been calculated, it needs to be multiplied by 130% (for pre-1 April 2023 costs) or 86% (for costs relating to 1 April 2023 onwards); the resulting amount is utilised as a deduction in the computation and reduces the profits chargeable to corporation tax. The claim benefit is simply the difference between corporation tax liability before and after this deduction.

R&D tax relief can reduce your business’s corporation tax liability in two ways:

1. Full Reduction: If the calculated claim benefit is equal to or more than your corporation tax liability, it will completely eliminate your business’s liability. You won’t have to pay any corporation tax for that year.
2. Partial Reduction: If the claim benefit is less than your corporation tax liability, it will reduce the amount due to HMRC. You’ll still have a corporation tax liability, but it will be lower than what it would’ve without the R&D tax relief claim.

Now, if you’ve already paid your corporation tax to HMRC before you claim relief, there are a couple of possible scenarios:

1. Rebate: If the R&D tax relief lowers your corporation tax liability than the amount you’ve already paid, HMRC will refund the difference.
2. Reduction of future tax payments: In some cases, instead of a direct refund, HMRC may apply the difference to reduce your future tax payments.

Prior to 1 April 2023, many profit-making companies were liable to corporation tax at a flat rate of 19%. Recent changes made to corporation tax rates means that for companies with profits over £250,000, the main rate of 25% will apply. If your business is in the future liable to corporation tax at 25%, the tax benefit will be greater than if your corporation tax was calculated at 19%, let’s say.

RDEC Scheme

After identifying and calculating the qualifying R&D expenditure, this amount should be multiplied by the RDEC rate, which is 13% (for pre-1 April 2023 costs) or 20% (for costs relating to 1 April 2023 onwards).  The resulting figure is your Research and Development Expenditure Credit (RDEC), which represents a ‘taxable credit’.

The next step involves applying this taxable credit to your business’s corporation tax computation. First, this credit is used to reduce your corporation tax liability. If there’s any credit remaining after this offset, it may be funded to you as a cash payment.