On The Spot Blogs
#Tax Myth 10 - R&D Tax Payments Should Always Be Claimed
With its tax reliefs improving over recent years, Research & Development claims should be given more attention.
For SMEs, when you spend £100 on R&D, your corporation tax is not only reduced by the £100 you've spent, but also by an additional £125, taking the total deduction against your company bill to £225.
If you're paying 20% corporation tax, you've saved additional tax of £25 (£125 @ 20%), taking total tax saved to £45 (£225 @ 20%).
If you're making losses (likely in a growth phase) this tax relief is delayed and has no immediate value.
Fortunately, you have another option. You can decide to forgo the later tax benefit of £45 and trade it in for an earlier cash payment of 11% of the losses. For the total losses of £225, this equates to nearly £25.
You can see you've received nearly one quarter of your R&D spend back in cash to help you grow your business, however, this cashflow improvement has cost you £20 of tax relief (£45 - £25).
Therefore, if you're expecting to make profits in the following accounting period, it may be less beneficial to reclaim the cash tax payment and instead wait to save more money against next year's corporation tax bill.
The same principles apply where you've subcontracted the R&D and your claim is reduced by 65%. The £20 cost of taking cash earlier referred to above becomes £16, or 16% of your spend on R&D.
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