For loss-making firms, two tax reliefs can be better than one

Why claim only one tax relief when you could claim two? It might sound too good to be true, but a company can often benefit from claiming two very different tax reliefs at the same time. Research and Development (R&D) tax relief and Capital Allowances are completely separate schemes but they can work together to reduce a company’s Corporation Tax liability. For a profitable company, the Capital Allowances and R&D tax relief claims will each reduce the firm’s taxable profits. When both are applied, the reductions work concurrently and both diminish the Corporation Tax liability. We usually advise that claiming Capital Allowance relief is only worthwhile where profits are being generated. This is because it reduces the amount of Corporation Tax a company has to pay on profits, so where there are no profits there can be no benefit. However, if a loss-making company is also making an R&D tax relief claim, a Capital Allowance claim can increase the amount that HMRC will pay on the R&D claim. This situation is best illustrated with the example of a loss-making company that qualifies for R&D tax relief and Capital Allowances: Loss before R&D tax relief claim and Capital Allowance claim £10,000 R&D qualifying costs £50,000 Additional amount claimable as Capital Allowances in the period following review £20,000 The cash back that relates to R&D tax relief only is the lower of: The revised loss of £75,000 (£10,000 loss and £50,000 qualifying costs, the latter of which the scheme allows you to uplift by 130%) The R&D uplifted cost together with the original base cost of the R&D = £115,000 (£50,000 and £50,000 qualifying costs uplifted by 130%) In this case, a £75,000 loss is surrendered in return for 14.5% cash from HMRC, which adds up to £10,875 in cash. Use of the R&D tax relief scheme becomes more worthwhile when combined with a Capital Allowances claim, as the loss will now be enhanced by the Capital Allowances and, therefore, the R&D tax credit is calculated on the lower of: The revised loss of £95,000 — made up of the £10,000 loss, the £50,000 qualifying costs (uplifted by 130%) and the £20,000 Capital Allowances. The R&D uplifted cost together with the original base cost of the R&D, which adds up to £115,000 (£50,000 and £50,000 qualifying costs uplifted by 130%) In this case, £95,000 loss is surrendered in return for 14.5% cash from HMRC, which adds up to £13,775 cash. As we can see from this example, the Capital Allowance claim for a loss-making company that is also carrying out R&D can also be converted into cash. In fact, the £20,000 Capital Allowance adjustment has generated a further £2,900 for the company. However, if the R&D uplifted cost exceeds the loss then the Capital Allowance claim will not result in extra cash being repaid, as the following example shows: Loss before R&D tax relief claim and Capital Allowance claim £100,000 R&D qualifying costs £50,000 Additional amount claimable as Capital Allowances in the period following review £20,000 The cash back looking at R&D tax relief only is the lower of: The revised loss of £165,000 (£100,000 loss plus the £50,000 qualifying costs uplifted by 130%) The R&D uplifted cost together with the original base cost of the R&D of £115,000 (£50,000 and £50,000 qualifying costs uplifted by 130%) In this case, a £115,000 loss is surrendered in return for 14.5% cash from HMRC, which equals £16,675 cash, with a £50,000 loss remaining to be carried forward. Meanwhile, the cash back looking at a combined R&D tax relief and Capital Allowances claim is the lower of: The revised loss of £185,000 (£100,000 loss and £50,000 qualifying costs uplifted by 130% plus the £20,000 Capital Allowances) The R&D uplifted cost together with the original base cost of the R&D of £115,000 (£50,000 and £50,000 qualifying costs uplifted by 130%) In this case, a £115,000 loss is surrendered in return for 14.5% cash from HMRC, equal to £16,675 cash, with a £70,000 loss remaining to be carried forward. So the cash repayment is the same regardless of the Capital Allowance position in this second example. Rather than create an additional cash benefit, the Capital Allowances have instead increased the company’s paper losses, something a client may be less enthusiastic about but could still lead to tax efficiencies in subsequent years. We can see from these examples that there is a sweet spot for combining R&D tax relief with Capital Allowances for loss-making companies. Accountants who can successfully identify when their client’s circumstances match those above can very easily create a meaningful additional benefit. Nigel Holmes, head of R&D Technical Operations at specialist tax consultancy Catax