The past year has been difficult for many businesses, with closures and staff isolating due to Covid as well as supply chain issues caused by Brexit.  Many companies may have suffered a corporation tax loss, possibly for the first time. The addition of an SME R&D claim may further increase this loss.

There are four potential uses for a corporation tax loss, the best use of which will vary depending upon a company’s circumstances.

Carry Back To Prior Years

Corporation tax losses can be carried back against prior year profits.  Normally the loss can only be carried back one year, however this has been temporarily extended to three years. The three year extension applies to losses incurred in accounting periods ending between 1 April 2020 and 31 March 2022.

If the corporation tax liability in relation to the prior period has been paid then this will generate a refund.  Refunds should normally be repaid by HMRC within eight weeks of the tax return being submitted.

This will save corporation tax at 19% and generate an immediate cash benefit.

Group Relief

If a company is a member of a group it is possible to surrender a loss to a fellow group company.  The full loss for the year does not need to be surrendered, as the company can choose how much of the loss to surrender.

The loss surrender will reduce the taxable profits, and associated tax liability in the claimant company, saving tax at 19%.

Carry Forward

The default option for losses is that they carry forward to be utilised against future profits.

With the rate of corporation tax set to rise to 25% from 1 April 2023 this option would result in the largest benefit. However the company needs to make a profit in the future in order to utilise the losses.  As forecasting future profitability can be difficult, particularly at present, there is no certainty that the loss will be able to be fully utilised in the future.

Surrender For Cash Credit

A loss generated as a result of an SME R&D claim may be surrendered for a cash credit.  The cash credit is 14.5% of the surrenderable loss.

This can be advantageous as it results in an immediate cash benefit, which can help ease cashflow issues. However, this will result in a lower tax benefit than the other options.

The cash credit should be paid by HMRC within 28 days of the tax return submission.

It is possible to use a combination of the four options.  For example, it would be possible to surrender the loss remaining after using a carry back to fully extinguish prior year profits.

If you would like to discuss the impact of your R&D claim on the loss position please contact us on 028 9040 6296.