R&D Tax Credits: Enhancement and surrender rates


Assuming you understand how enhancement and surrender rates work (if not, check this article), there’s still the tricky question of figuring out which rate to use.

Recently, HMRC have changed their rates pretty much every year (and they may well continue). This is due to the government’s decision to improve the return of R&D Tax Credits. As we’ll see below, the improvement isn’t quite as obvious in all cases as one might think, but first let’s deal with the simple questions.

What are the key rates?

The key numbers you need to know are the rate of enhancement and the rate of surrender. The enhancement is only relevant to profitable companies, while both rates are relevant to loss-making companies.

As we’ve seen in other articles, R&D Tax Credits work by enhancing a “qualified expense” by a certain percentage. This results in an additional deduction from the taxable profit, and therefore a reduction of tax. If the company is already loss-making or is pushed into a loss, then the loss that has been created, and maybe even the whole “enhanced expenditure”, may be surrendered for cash. So, here are the key rates for each period:

Period Enhancement Rate Surrender Rate
Before 31st March 2011 175% 14%
1st April 2011 – 31st March 2012 200% 12.5%
1st April 2012 – 31st March 2014 225% 11%
1st April 2014 – 31st March 2015 225% 14.5%
After 1st April 2015 230% 14.5%

The exact return that you get for your “qualifying expenditure” is not so straightforward to calculate, since it depends on your profit or loss for the year, and on your rate of corporation tax, but the rough thumb rule is that before 2011 it was up to 24.5% for unprofitable companies, and up to 15% for profitable companies. After 2012 it is up to 24.75% for unprofitable companies and up to 25% for profitable ones (and even more for very profitable companies). So, while profitable companies have greatly benefited from the increase in the rate, it’s made little or no difference to unprofitable ones, in terms of the rate of return on qualified expenditure.

What if my accounting year isn’t April to April?

Of course, most people don’t have their accounting reference date (the date your accounts are “made up to”) falling in April. How should you deal with these rates then?

The simplest approach is to pro-rate the enhancement and surrender. HMRC is generally happy with that, and unless there is a good reason not to (e.g. you’re a profitable company and most of your expense falls in the latter, better-enhanced part of the year), then this is probably the smart approach.

For example, if your accounting year ends on 31st December, and you’re filing for the year ending 31st December 2011, then you can prorate it by counting 3 months at 175%/14% and 9 at 200%/12.5%. In other words, the enhancement rate would be:

> (3 x 175% + 9 x 200%) / 12 = 193.75%

And the surrender rate would be:

> (3 x 14% + 9 x 12.5%) / 12 = 12.875%

Do unprofitable companies really get no benefit?

Finally, let’s deal with unprofitable companies and their apparently static rate of surrender. Do the government’s great plans for enhanced tax credits really not help them?

Actually, they do, but in a different way. The total return on “qualifying expenditure” for unprofitable companies may well be stagnant (going from 24.5% to 25% and then back down to 24.75%), but an important change to the small companies regime has been the removal of the so-called PAYE/NIC cap.

It used to be that the total amount of cash that the company could get by surrendering a loss was limited by their, and their employee’s, PAYE and NI contributions (yes, most of that is paid by the employees rather than the company, but thus go HMRC’s whims…). Many companies that we work with hit against this cap, and so they ended up generating moderately useful “loss carried forward” instead of cold, hard cash in the pocket.

For accounting years ending on or after 1st April 2012, this cap has been removed. That’s a great relief in particular to companies that employ a lot of subcontractors, and this is not prorated – it applies to the entire year.

In conclusion

Pro-rating the rates is not hard if you know what the rates are. Of course, HMRC hasn’t (as of this writing) yet published the 11% rate on their website, which makes this less than obvious! Hopefully this article contains the answer you were looking for.

If you are curious about R&D Tax Credits, Innovation Grants and Open Culture






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