In his budget speech today the Chancellor slipped in this seemingly innocuous line:
“I’m raising the rate of the R&D tax credit for loss-making small businesses from 11% to 14.5%.”
The impact of this is enormous.
The 11% is the rate that companies currently can cash-in their tax losses. But, as the 11% is calculated on the uplifted value of eligible expenditure, currently 225%, it produces a cash repayment of £24.75 for every £100 of eligible R&D expenditure (£225 x 11%). Cash worth having as a loss making SME as many startups are.
However, this is really good news. For example, by applying the new rate of 14.5% a company with eligible R&D expenditure of £100,000 but lacking a Corporation Tax liability could claim an extra £7,875, as follows:
The uplift of the £100,000 expenditure eligible for R&D Tax Credit, currently 225% = tax allowances of £225,000.
Surrendering this £225,000 for cash, currently at 11%, produces a cash payment from HMRC of £24,750.
Surrendering at the new higher rate of 14.5% will produce a cash payment of £32,625 – an increase in cash of £7,875 (31.8%) over the current rate. This cash payment also represents almost a one-third contribution to the R&D expenditure – priceless to new companies trying to get established or to established companies seeking to expand.
The Chancellor did not state the date from which the new rate will apply but it is reasonable to assume from 5th April 2014 – check back with us for the very latest status.