Background
The rates of relief for R&D changed for qualifying expenditure incurred on or after 1 April 2023 (see s4, Finance Act 2023).
The rates have changed, as follows:
| Expenditure incurred before 1 April 2023* | Expenditure incurred on or after 1 April 2023 | |
| R&D expenditure credit | 13% | 20% |
| R&D additional deduction for SMEs | 130% | 86% |
| R&D payable credit for SMEs | 14.5% | 10%/14.5%** |
* Note that these rates were introduced from various dates.
** Spring Budget 2023 announced a new category of R&D-intensive SME that will continue to receive a payable credit (if relevant) at 14.5%. Subject to the legislation being enacted, these will be SMEs whose eligible R&D expenditure is at least 40% of their total tax-deductible expenditure for the year.
The results for accounting periods spanning 1 April 2023 must be split between financial year 2022 and financial year 2023 on a time basis.
This necessitates various steps for calculating the tax relief or tax credit available. The examples below demonstrate the position under the SME scheme.
Note that where R&D expenditure is taken to the balance sheet in one accounting period and then amortised or impaired through profit or loss in a later accounting period, relief may only be claimed at the rate that applied when the expenditure was incurred. The examples below assume that the expenditure is reflected in profit or loss in the same accounting period as when it was incurred.
Example 1: SME with payable credit restricted to unrelieved trading loss
An SME with no associated companies has the following trading results for the year ended 30 September 2023:
| £ | |
| Turnover | 425,000 |
| Tax deductible expenditure (including £80,000 of qualifying R&D expenditure before enhanced R&D tax relief) | (400,000) |
| Trading profits before enhanced R&D tax relief | 25,000 |
As the rate of SME R&D tax relief reduced from 130% to 86% on 1 April 2023, it is necessary to split the qualifying expenditure of £80,000 based on when the expenditure was incurred.
Of that qualifying expenditure, £35,000 was incurred in the period from 1 October 2022 to 31 March 2023 and the remaining £45,000 was incurred in the period from 1 April 2023 to 30 September 2023.
The amount of enhanced R&D tax relief available is:
| £ | |
| £35,000 x 130% = | 45,500 |
| £45,000 x 86% = | 38,700 |
| Total enhanced R&D tax relief | 84,200 |
After deducting the R&D tax relief, the company has a loss of £59,200 for the year ended 30 September 2023 (£25,000-£84,200).
As the company’s accounting period straddles 1 April 2023, the date when the small profits rate was introduced, the accounting period must be split into two accounting periods. The result for the year is time apportioned between those periods.
The loss is apportioned as follows:
| £ | |
| FY22: £59,200 x 182/365 = | 29,519 |
| FY23: £59,200 x 183/365 = | 29,681 |
The company wishes to claim a payable R&D credit. The amount on which a credit can be claimed is the lower of the unrelieved trading loss and the related enhanced R&D expenditure.
For the period from 1 October 2022 to 31 March 2023, the rate of the payable credit is 14.5%. The amount that can be surrendered is the lower of:
- £29,519 (the unrelieved trading loss); and
- £80,500 (230% of the qualifying R&D expenditure in the period of £35,000).
The payable credit for the period from 1 October 2022 to 31 March 2023 is £4,280 (£29,519 x 14.5%).
For the period from 1 April 2023 to 30 September 2023, the rate of the payable credit is 10%. This is on the basis that the eligible R&D expenditure is less than 40% of the total tax-deductible expenditure for the year. The amount that can be surrendered is the lower of:
- £29,681 (the unrelieved trading loss); and
- £83,700 (186% of the qualifying R&D expenditure in the period of £45,000).
The payable credit for the period from 1 April 2023 to 30 September 2023 is £2,968 (£29,681 x 10%).
The total payable credit is for the year ended 30 September 2023 is £7,248 (£4,280 + £2,968).
Without R&D tax relief and payable credits, the company’s tax position would be as follows:
The original profit of £25,000 would be apportioned as follows:
| £ | |
| FY22: £25,000 x 182/365 = | 12,466 |
| FY23: £25,000 x 183/365 = | 12,534 |
The profits for the FY23 period would be below the time apportioned small profits limit of £25,068 (£50,000 x 183/365), so the small profits rate of 19% would apply. The corporation tax payable for the whole accounting period would have been £4,750 (£25,000 x 19%).
The R&D tax relief and payable credits have given an overall saving of £11,998 (£7,248 + £4,750). This equates to around 15% of the qualifying R&D expenditure.
The company will have no losses remaining to carry forward as they will have been surrendered in full.
Example 2: Loss-making SME
An SME with no associated companies has the following trading results for the year ended 30 September 2023:
| £ | |
| Turnover | 315,000 |
| Tax deductible expenditure (including £80,000 of qualifying R&D expenditure before enhanced R&D tax relief) | (400,000) |
| Trading loss before enhanced R&D tax relief | (85,000) |
The amount of enhanced R&D tax relief available is the same as in Example 1 (ie, £84,200).
After deducting the R&D tax relief, the company has a loss of £169,200 for the year ended 30 September 2023 (£85,000 + £84,200).
As the company’s accounting period straddles 1 April 2023, the date when the small profits rate was introduced, the accounting period must be split into two accounting periods. The result for the year is time apportioned between those periods.
The loss is apportioned as follows:
| £ | |
| FY22: £169,200 x 182/365 = | 84,368 |
| FY23: £169,200 x 183/365 = | 84,832 |
The company wishes to claim a payable R&D credit. The amount on which a credit can be claimed is the lower of the unrelieved trading loss and the related enhanced R&D expenditure.
For the period from 1 October 2022 to 31 March 2023, the rate of the payable credit is 14.5%. The amount that can be surrendered is the lower of:
- £84,368 (the unrelieved trading loss); and
- £80,500 (230% of the qualifying R&D expenditure in the period of £35,000).
The payable credit for the period from 1 October 2022 to 31 March 2023 is £11,673 (£80,500 x 14.5%).
For the period from 1 April 2023 to 30 September 2023, the rate of the payable credit is 10%. This is on the basis that the eligible R&D expenditure is less than 40% of the total tax-deductible expenditure for the year. The amount that can be surrendered is the lower of:
- £84,832 (the unrelieved trading loss); and
- £83,700 (186% of the qualifying R&D expenditure in the period of £45,000).
The payable credit for the period from 1 April 2023 to 30 September 2023 is £8,370 (£83,700 x 10%).
The total payable credit for the year ended 30 September 2023 is £20,043 (£11,673 + £8,370). This equates to just over 25% of qualifying R&D expenditure.
However, the company’s trading losses available to carry forward are reduced to £5,000 from £85,000 ((£84,368 - £80,500) + (£84,832 - £83,700)).
Example 3: SME that remains in profit after enhanced R&D tax relief
An SME with no associated companies has the following trading results for the year ended 30 September 2023:
| £ | |
| Turnover | 485,000 |
| Tax deductible expenditure (including £80,000 of qualifying R&D expenditure before enhanced R&D tax relief) | (400,000) |
| Trading profits before enhanced R&D tax relief | 85,000 |
The amount of enhanced R&D tax relief available is the same as in Example 1 (ie, £84,200).
After deducting the R&D tax relief, the company has a profit of £800 for the year ended 30 September 2023 (£85,000 - £84,200).
As the company’s accounting period straddles 1 April 2023, the date when the small profits rate was introduced, the accounting period must be split into two accounting periods. The result for the year is time apportioned between those periods.
The profit is apportioned as follows:
| £ | |
| FY22: £800 x 182/365 = | 399 |
| FY23: £800 x 183/365 = | 401 |
The profits for the FY23 period are below the time apportioned small profits limit of £25,068 (£50,000 x 183/365), so the small profits rate of 19% applies.
The corporation tax payable is £152 (£800 x 19%).
Without R&D tax relief, the company’s tax position would be as follows:
The original profit of £85,000 would be apportioned as follows:
| £ | |
| FY22: £85,000 x 182/365 = | 42,384 |
| FY23: £85,000 x 183/365 = | 42,616 |
The profits for the FY23 period would be above the time apportioned small profits limit of £25,068 (£50,000 x 183/365) and below the upper limit of £125,342 (£250,000 x 183/365), so the main rate of 25% would apply with marginal relief.
The corporation tax payable would have been £17,466 ((£42,384 x 19%) + (£42,616 x 25%) – (3/200 x (£125,342 - £42,616))).
R&D tax relief has provided a corporation tax saving of £17,314 (£17,466 - £152). This equates to just over 21.6% of qualifying R&D expenditure.
Further reading
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