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How Does HMRC Pay Out The R&D Tax Credit?

Claiming R&D tax credits can be a vital source of funding for innovative UK businesses—but how does the actual payout process work once your claim is approved?

Whether you're a startup filing for the first time or a growing company refining your claims process, understanding how and when HMRC pays out can help you manage your cash flow and plan ahead more confidently.

Your claim value will change depending on your company size, your profitability, the intensity of your R&D activity and the accounting period you are claiming in.

Most companies will be claiming through the Merged Scheme for accounting periods beginning on or after 1 April 2024. However, it’s important to know if you are eligible for the ERIS Scheme, as it offers a higher benefit for claimants.

For accounting periods beginning before 1 April 2024, the majority of companies claim through the SME Scheme. However, unlike with the ERIS Scheme, companies do not have the option to choose between the SME and RDEC Schemes; you are either eligible for one or the other.

The effective rates for these schemes are as follows:

The R&D tax credit is paid out in different ways depending on the scheme you claim through and your profitability. Through the SME scheme, companies can claim an additional deduction to reduce their profits or increase their losses.

The additional deduction is a notional extra deduction beyond the usual 100% deduction for all eligible costs. Essentially, you can deduct your eligible costs from your profits twice, once in the usual preparation of a profit and loss and again when you calculate your R&D tax relief. The additional deduction does not affect your profitability on your statutory accounts.

Under the SME scheme, the additional deduction is either an extra 130% for expenditure incurred up to 1 April 2023 or 86% for expenditure incurred from this date. If your period crosses this date, you should create two notional periods for the different rates.

Profit-making companies claiming through the SME scheme

Profit-making companies can use this additional deduction to reduce their profits and, therefore, their Corporation Tax bill. You can receive a refund if you’ve already paid your tax bill.

To calculate the R&D tax credit as a profit-making SME, you should follow the following steps:

• Step 1 – Work out your R&D expenditure for the accounting period.
• Step 2 – Calculate the R&D enhanced deduction, depending on the date of the expenditure.
• Step 3 – Calculate the revised taxable profit for the relevant period by subtracting the usual deduction of company costs and the R&D enhanced deduction from your taxable profits.
• Step 4 – Calculate your reduced Corporation Tax liability by multiplying the revised taxable profit by the relevant Corporation Tax Rate.

For example:

Company A made a taxable profit of £300,000 for the accounting period from 1 April 2023 to 31 March 2024 and was due to pay £75,000 of corporation tax. The company identified £100,000 of eligible R&D expenditure.

• The Step 1 value is £100,000, the R&D expenditure.
• The Step 2 value is £86,000, the R&D expenditure multiplied by 86%, since all R&D expenditure occurred after 1 April 2023.
• The Step 3 value is £214,000, which are the total profits of £300,000 minus the R&D additional enhanced deduction of £86,000.
• The Step 4 value is £53,500, or 25% of £214,000, as Company A is subject to the main rate of Corporation Tax (25%).

Without R&D tax relief, the company would have paid £75,000 in Corporation tax on profits of £300,000. Therefore, Company A made a Corporation Tax Saving of £21,750 by making an R&D tax relief claim.

Loss-making companies claiming through the SME scheme

Loss-making companies, or those with small profits that are wiped out by the additional deduction, have multiple options for how they wish to use their R&D tax credit:

• carry back the loss to the previous accounting period (if there was a taxable profit)
• carry the loss forward and offset against future profits
• surrender the loss to a group company
• surrender the loss (fully or partially) to HMRC in return for a payable R&D tax credit

The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period for a cash credit.

Companies can surrender their losses at different rates depending on when the expenditure occurred. For expenditure that occurred before 1 April 2023, the rate is 14.5% and 10% thereafter.

The exception to these above rates is for those claiming through the Enhanced R&D Intensive Support (ERIS) Scheme, whereby eligible loss-making companies can surrender their losses at a higher rate of 14.5% even after 1 April 2023.

The following steps are used for companies claiming on a loss:

• Step 1 – Work out your R&D expenditure for the accounting period.
• Step 2 – Calculate the R&D enhanced deduction, depending on the date of the expenditure.
• Step 3 – Calculate the revised taxable loss for the period by deducting the usual deduction of company costs and the R&D additional deduction from your taxable profits.
• Step 4 – Decide to surrender this loss for a payable tax credit at the relevant rate. The surrenderable amount will be the lower of:
  • The unrelieved trading loss, not including losses carried forward or back.
  • The total enhanced R&D deduction (i.e., the expenditure + the additional deduction).
• Step 5 – If you decide not to surrender the loss, you can carry the losses forward or back one year to offset against taxable profits or surrender the loss to a group company.

The R&D Expenditure Credit (RDEC) scheme was used as the basis for the new Merged Scheme when HMRC was considering how to revamp the R&D tax scheme to make it simpler. Therefore, the method for claiming for companies eligible under the RDEC scheme and for all companies claiming through the Merged Scheme is the same.

The expenditure credit is treated as taxable gross income and will be subject to corporation tax.

As with the SME scheme, the rates changed for expenditure incurred on or after 1 April 2023; the headline rate was 13% before this date and was increased to 20%.

The process of claiming through RDEC and the Merged Scheme uses the following steps:

• Step 1 – Work out your R&D expenditure for the accounting period.
• Step 2 – Calculate the R&D expenditure credit by multiplying the expenditure by the relevant rate.
• Step 3 – The expenditure credit will be the gross amount less the main corporation tax rate.

For example:

Company B is a large company claiming under the RDEC scheme for an accounting period running from 1 April 2023 to 31 March 2024. It makes a profit of £100,000 for the period and has £500,000 in R&D expenditure.

First, the company needs to work out the value of their credit, which is £500,000 multiplied by the relevant rate (20% for this period), i.e., £100,000. This is taxed at the main rate for Corporation Tax (25%), leaving the company with £75,000 in an expenditure credit.

There are specific, additional steps for redeeming your credit. The credit is paid out using the following steps:

• Step 1 – Discharge your Corporation Tax bill (alongside any expenditure or tax credits carried forward from previous accounting periods).
• Step 2 – If there is any credit left from Step 1, a notional tax deduction is applied. This step ensures that the benefit of the expenditure credit reflects the company's tax position. The lower of either the amount remaining after Step 1 or the gross RDEC with the notional tax deduction can be carried forward to Step 3.
  • Identify the amount of credit remaining after Step 1.
  • Determine your applicable tax rate (main rate or small profits rate).
  • Establish the gross RDEC for the period (excluding any previous periods carried forward) net of the applicable tax rate determined.
  • The lower of either the amount remaining after Step 1 or the net RDEC, after it has been taxed, is the amount that can be taken on to Step 3.
  • The notional tax deduction (if the net RDEC is the lower amount) can be either surrendered to a group company or carried forward to offset CT in future periods.
• Step 3 – Before proceeding to Step 4, the company needs to ensure that the amount carried forward to Step 3 does not exceed the PAYE cap. If it does, the amount that exceeds the cap is deducted and considered a credit the company is entitled to in the next accounting period.
• Step 4 – The amount remaining after Step 3 must be used to discharge any CT liabilities for other accounting periods.
• Step 5 – Any amount remaining after Step 4 can be surrendered in whole or in part to another group member.
• Step 6 – The amount remaining after Step 5 must be used to discharge any other liability of the company to HMRC (e.g., VAT, PAYE…).
• Step 7 – If any credit remains, it is payable to the company!

Many companies have complex accounting needs, especially with group structures to consider and any previous claims. Tax Cloud’s team of experts is always happy to discuss the nitty gritty of R&D tax; get in touch to discuss the best way you can make use of this generous incentive.

Alternatively, download your free copy of our eBook on all things R&D tax here.