Calculating tax benefit

Calculating tax benefit

Quick guide to calculating the benefit of your client's R&D tax relief claim

The calculation of tax benefit from a R&D tax relief claim can be complicated. The R&D tax credit rates of relief differ between the schemes, for companies in profit and those in a loss-making position, and depending on the dates of the claim.

Current R&D tax rates of relief



To 31st March 2023
From April 1st 2023
Claim periods starting on or after 1st April 2024
SME
Enhancement rate
130%
86%
-

Tax credit rate
14.5%
10%
-

R&D Intensive SME tax credit rate
-
14.5%
-





RDEC
Tax credit rate
13%
20%
-





Merged RDEC
Tax credit rate
-
-
20%

Enhanced R&D intensive support
-
-
14.5% tax credit
86% enhancement

How to calculate the tax benefit

Profit-making SME example (SME scheme)

  • Business made profits of £250,000 for the year

  • Corporation tax (25%) due before R&D claim = £62,500

  • Business has £100,000 of eligible expenditure

  • SME enhancement rate 186%

Calculation

Profit before R&D
£250,000
Enhanced deduction*
(£186,000)
Revised profit
£164,000
Corporation tax at 25%
£41,000
Tax benefit
£21,500

* £100,000 x 186% = £186,000. However, £100,000 of costs are already included in the profit figure so only £86,000 should be deducted

Loss making SME example (Enhanced R&D intensive support)

  • Business made loss of £250,000 for the year

  • Business has £100,000 of eligible expenditure

  • Eligible expenditure is more than 30% of overall expenditure

  • SME enhancement rate 186%

  • Surrender credit 14.5% of enhanced R&D costs

Calculation

Loss before R&D
(£250,000)
Enhanced deduction*
(£86,000)
Revised loss
(£336,000)
Maximum losses available to surrender**
(£186,000)
Tax credit received
£26,970

* £100,000 x 186% = £186,000. However, £100,000 of costs are already included in the profit figure so only £86,000 should be deducted

** £100,000 x 186% = £186,000. Surrendered losses cannot exceed the enhanced expenditure.

Merged scheme example - loss-making

  • Business has £100,000 of eligible expenditure

  • Eligible expenditure is less that 30% of overall expenditure

  • Business has turnover of £500,000

  • Business made a loss before R&D of £300,000 for the year

  • Tax credit rate 20%

  • Tax rate 19%

Calculation

Turnover
£500,000
R&D Expenditure
£100,000
Other expenditure
£700,000
Profit/(Loss) before tax
(£300,000)
RDEC at 20%
£20,000
Tax charged at 19%
£3,800
RDEC credit payable
£16,200


For more information about calculating the tax benefit of your client's R&D claim, please watch the following webinar recording:





    • Related Articles

    • Grants and RD tax relief

      The interaction of grants and R&D tax credits can be complex, but it's very important to get it right - treating grants incorrectly can lead to vastly over or under-claiming R&D tax relief. However, there are a few simple rules that can help you get ...

    • R&D Tax Relief: Merged scheme basics

      The R&D Tax Relief Scheme was introduced in the U.K. in 2000 to support and reward companies undertaking the costly and sometimes onerous business of research and development. This guide aims to give you an idea of how to assess your client’s R&D tax ...

    • R&D Tax Relief: SME and RDEC basics

      The R&D Tax Relief Scheme was introduced in the U.K. in 2000 to support and reward companies undertaking the costly and sometimes onerous business of research and development. This guide aims to give you an idea of how to assess your client’s R&D tax ...

    • What do HMRC expect from R&D tax relief claimants?

      In October 2023 HMRC published guidance (GfC3) on the process it expects claimants to follow when preparing a claim for R&D tax relief. Much of this guidance is the same as that found in the CIRD. However, the GfC3 also contains details about the ...

    • Best practice in preparing and R&D tax relief claim