Under the SME scheme, the company receives a second tax deduction for the qualifying costs on top of the normal tax deduction that the company receives through its accounts. The second deduction goes through the company’s corporation tax return and is currently 130% of the qualifying costs. This gives a total effective tax deduction for the qualifying costs of 230%.
The second tax deduction will reduce the taxable profits of the company giving relief at the company’s tax rate, currently 19%.
This means that for every £1 spent the company receives an extra tax saving of 24.7p on top of the normal tax saving of 19p.
If the extra tax deduction is greater than the taxable profits, a tax loss will be created. Normally, a tax loss can be carried back against taxable profits in the previous 12 months or used to relieve taxable profits of other group companies. Any remaining loss is then carried forward to be used against future profits.
With a loss produced by R&D tax credits we have the option of surrendering the loss for cash rather than carrying it forward. The rate of surrender is less than the rate received if the loss is carried forward, 14.5% rather than 19% but most companies prefer to have a lower amount of cash sooner rather than a higher amount later.
The loss that can be surrendered is restricted to the loss relating to R&D not general trading.