R&D Tax Credit Calculation | How Much Will You Get Back and How are Your Returns Calculated?

Calculating your return on an R&D Tax Credit claim can be confusing. However "how much will I get back" is the most important piece of information, when factoring R&D Tax Credits into your business planning. So let me help you by explaining R&D Tax Credit calculation, including the main scenarios, and some other considerations to ensure you maximise your benefit.

For an estimate calculation - you need to know how much you’ve spent on eligible R&D costs. For more advice on what cost you can include – check out this page. The amount you get back will depend on how much you've spent and your financial situation. If your company is paying corporation tax (referred to as profit-making below) – you’ll receive your benefit as a reduction or refund in your corporation tax bill. If there’s no corporation tax (referred to as loss-making below), the calculation will be different.

Read on to understand how your tax credit will be calculated, or if you just want to know ‘how much can I save' you could use our calculator tool to find out (link).

R&D Tax Credit Calculations for a Profit-Making Company

The R&D tax credit is calculated by applying a 130% multiplier to your R&D costs to create an ‘enhancement’. This 130% enhancement is then offset against your taxable profits, to reduce your corporation tax bill.

Let’s use an example. Jane’s Machinery has spent £100k developing a new piece of manufacturing machinery, as well as making good profits for the year.

Without using the R&D tax credit, their £100k R&D expenditure will be applicable to reduce their taxable profits for the year. With a 19% rate of corporation tax, the £100k will already reduce their tax bill by £19k.

With the R&D tax credit scheme, they are eligible for a 130% enhancement, which will reduce their taxable profits by an additional £130k. Again using a 19% rate of corporation tax, this will reduce their tax bill by an additional £25k.

As shown in this example – profit-making companies, such as Jane's Machinery, can re-claim an additional 25% of their R&D costs through a reduction or refund in their Corporation Tax. But what if your company is making a loss?

R&D Tax Credit Calculations for a Loss-Making Company

Where there is no profit, there is no corporation tax to be refunded. But all is not lost. HMRC allow you to ‘surrender' your losses for a Payable Tax Credit. In fact – not only can you surrender your 130% enhancement, but you can also surrender the original cost of your R&D, as long as the costs led to trading losses. In total – you can surrender up to 230% of the cost of your R&D for a payable tax credit – the more you surrender, the more cash you get.

But what does it mean to ‘surrender’ your losses? By taking the payable tax credit, you are foregoing the right to carry your losses forward.  Carrying them forward could be useful to reduce your corporation tax bills in the future. Instead, by choosing to surrender them, you will be paid 14.5% of the losses as a Payable Tax Credit, without the wait.

Let’s use a similar example. Joe’s Packaging has spent £100k developing a new method of vacuum wrapping. But it’s been a rough year and they’ve made a significant loss. Using the R&D tax credit scheme – they can surrender 230% of the cost of the R&D as a Payable Tax Credit. At the surrender rate of 14.5%, and surrendering the full £230k, they get a Payable Tax Credit of £33k or 33% of their total R&D costs.

So loss-making companies can re-claim up to 33% of their R&D costs with a Payable Tax Credit. But there are some alternative scenarios that can make claiming more difficult, or can allow you to claim more. Here are some examples.

Other Scenarios to Consider When Maximising R&D Tax Credit Returns

Factors Limiting How Much You Can Claim

• Small Profits: where your taxable profits is less than the 130% enhancement, you won’t be able to claim the full 25% of costs as a reduction in Corporation Tax. You’ll be able to reduce your Corporation Tax bill to £0 or receive a full refund. However, the R&D tax Credit will effectively push you into a loss making position. You can take the remaining value of your enhancement as a payable tax Credit. Your total return will be somewhere between 19% and 25%.
• Small Losses: where your losses are less than 100% of your R&D costs, you won’t be able to surrender the full 230% of your expenditure. You’ll only be able to surrender your losses after the enhancement has been applied. This means your total return will be somewhere between 19% and 33% of your eligible cost.
• Losses Carried Forward to Offset your Profits: where you made losses in a previous accounting period which have been carried forward to reduce your taxable profit, that loss will be applied before your 130% R&D tax credit enhancement. This means you may not receive any reduction in Corporation Tax this year. You may need to carry any losses forward again, to use them next year to generate a tax saving.

Strategies for Increasing Your Claim Value

• Carrying your Losses Back or Forward: you may be able to increase your returns by carrying losses backward or forward to other accounting periods. This may allow you to reduce your Corporation Tax bills, and achieve a higher benefit. We’ll always let you know if this is an option.
• Surrendering Group Losses: you may be able to increase your returns by surrendering losses related to your R&D Tax Credit to group companies. This could allow you to reduce your Corporation Tax bill across your group structure.

In summary – there’s a lot to consider – and maximising your R&D Tax Credit claim isn’t always easy or simple. If you need expert guidance on how to increase your benefit and plan for future claims, get in contact.

Alternatively - now you know how much you'll get back – you can read our next article to find out how to submit your claim: How to Claim R&D Tax Credits | The Application Process for the R&D Tax Relief for SME’s