R&D tax credits: Claim now or wait for future relief at 25%?

Steve Livingston -

Nine times out of ten, the answer was predictable.

"I'll claim the R&D tax credit cash rebate now, please."

This is despite the fact that companies would get a better cash result if they could hold out and cash in the enhanced R&D tax losses against future taxable profits.

After all, the current SME R&D tax credit is 14.5%.

This compares with a current company corporation tax rate of 19%.

Which boils down to the following simple question:

Would you rather have 14.5p in every £1 paid back to you or 19p in every £1 - that's your choice?

The answer looks like a no-brainer.

But there's one important caveat:

  • You can have the 14.5p per £1 back within the next 40(ish) days OR
  • You can have the preferable rate of 19p per £1 back maybe sometime next year, or maybe the year after that, or the year after that (and so on...or maybe sometime never...).

The above analysis also ignores some additional important points:

  1. 14.5% v 19% just isn't that much - clearly this depends on the relative size of the R&D claim but for many business owners, the difference in rates just isn't worth waiting for (especially when they consider the following factors).
  2. Time value of money - put simply, if you can get your hands on the cash in the next 40 days, you can put it to work asap in your business - at today's purchasing power. However, if you wait until you next see taxable profits, it could be a long wait (especially if you expect year-on-year claims to be filed). The purchasing power of money erodes over time (we can see this vividly right now with rampant inflation in play).
  3. Opportunity cost - money left sitting in tax losses that you hope to get your hands on in the future means that you are missing out on the opportunity to use it now. You could be buying new and more efficient equipment or investing in more staff for increased productivity.
  4. Emotion - it is nice to see the cash sitting in your bank account. You can use it. Otherwise, it's left 'stuck' in surplus tax losses to be used 'one day soon'... (but you can't get at it!).

But will the increase in company tax rates to 25% from 1 April 2023 swing the vote...?

As I mentioned, 14.5% v 19% isn't that compelling.

But 14.5% v 25%...?

Now that looks worth a second look...

For companies that are currently working on their 2021, 2022 and into 2023 year-end R&D claims, the 'tried and tested' default option of "I'll take the tax credit now" might be worth pausing for thought.

It all depends on your forecast taxable profits for 2023 onwards.

If you are forecasting taxable profits and cashflow currently looks stable, then perhaps you should pause in pulling the R&D tax credit claim trigger. And wait for the 25% rate of return on the enhanced R&D tax losses.

If, on the other hand, you're still losing money year-on-year, in the short-term, then the answer probably hasn't changed, and you will probably want to claim the R&D tax credit as normal.

The more interesting area is those companies that are forecasting profits for future years but have yet to formulate or quantify any future R&D claims (as yet).

Reach out for help.