HMRC will allow an extra 120% (12% for large companies) of identified costs (more of which later) to be written off against taxable profits. Therefore if R&D expenditure of £100,000 is identified, HMRC will allow £220,000 to be included in the tax computation, giving an extra £120,000 of cost to be offset against taxable profits.
The current corporation tax rate is circa 19%, which equates to a £22,800 reduction in a tax liability. Loss-making companies are not excluded from the benefits, and tax credits can be claimed on the losses enhanced by the R&D expenditure instead of carrying the losses forward to offset against future profits. Loss-making companies are able to surrender the losses attributable to the R&D claim for a 14.5% R&D tax credit.
Retrospective claims can be made for the past two accounting periods which can often result in a significant repayment of corporation tax, or if a company is loss-making, a claim for R&D tax credits. It is therefore important to discover if a claim can be made as soon as possible so as not to miss out on any retrospective claims.