Understanding the Surrender Rate for R&D Tax Credits in the UK for Loss-Making SMEs
In the UK, the R&D tax credits scheme offers substantial support to companies engaged in research and development, particularly Small and Medium-sized Enterprises (SMEs). One critical aspect of this scheme is the ‘surrender rate’, relevant to loss-making SMEs. Let’s explore how it functions and its significance.
What is the Surrender Rate?
- Definition: The surrender rate in the context of R&D tax credits refers to the proportion of a company’s R&D-related losses that can be surrendered in exchange for a payable tax credit. This mechanism is particularly vital for unprofitable SMEs, which, despite not having a tax liability against which to offset R&D tax relief, can still benefit financially from their R&D activities.
- Functioning: For expenditures incurred before April 1, 2023, the surrender rate was 14.5%. This meant that for every £1 of loss surrendered, the company could receive 14.5 pence as a cash credit. However, this has been revised for expenditures incurred from April 1, 2023, onwards.
Recent Changes in Surrender Rate
- Rate Reduction: From April 1, 2023, the general surrender rate for loss-making companies was reduced from 14.5% to 10%. This change impacts the amount of cash credit that loss-making SMEs can receive through the R&D tax credits scheme.
- Exceptions for R&D Intensive SMEs: An important exception to this reduction is for ‘R&D intensive’ SMEs, defined as those where qualifying R&D expenditure constitutes at least 40% * of the company’s total expenditure. For these companies, the surrender rate remains at 14.5% even after April 1, 2023. (* This 40% threshold has since been lowered to 30% from April 2024).
- Impact on Cash Credit Value: Considering the enhancement mechanism, the cash credit value that a company can claim is now between 8.6p and 33.35p for every £1 invested in qualifying R&D projects, depending on the surrender rate applicable and the extent of R&D investment.
Implications for Loss-Making SMEs
- Strategic Decisions: Loss-making SMEs need to carefully evaluate whether to surrender their losses for immediate cash credit or carry them forward to offset against future corporation tax liabilities. This decision hinges on the company’s current financial situation and future profitability expectations.
- Assessing R&D Intensity: For companies close to the 40% threshold of R&D intensity, it might be beneficial to reassess their R&D expenditure to maximise the cash credit rate they can claim.
The surrender rate for R&D tax credits is a critical tool for loss-making SMEs in the UK, enabling them to monetise their R&D losses. While the recent changes have reduced the surrender rate for some companies, R&D intensive SMEs continue to enjoy a higher rate, underscoring the government’s commitment to fostering a robust R&D ecosystem. Businesses must stay informed and strategically plan their R&D investments and tax credit claims to maximise benefits under this scheme.
