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Are you paying too much for your Payable Tax Credits?

09 Feb 2022

Payable Tax Credits are one of the benefits of an R&D claim which surrenders losses to create a payable amount to the company from HMRC.  Many R&D consultants base their fee on a percentage of their client’s benefit, but this can be very misleading as the following example shows.

As a simple example….

  • Company A had £100,000 of losses in 2020 prior to their R&D claim.
  • They worked with a specialist consultancy firm who identified £100,000 of qualifying R&D expenditure.
  • Due to the 230% uplift on R&D costs, the company’s losses were increased to £230,000.
  • The company surrendered all of their losses for a Payable Tax Credit (at a rate of 14.5%).
  • The company received £33,350 from HMRC (£230,000 x 14.5%).
  • The specialist consultancy firm charged a fee of 20% so invoiced the company for £6,670 (£33,350 x 20%).

This might all seem reasonable HOWEVER, in 2021, the company had taxable profits of £200,000 on which £38,000 of Corporation Tax was payable.  Prior to the previous year’s R&D claim, they were carrying forward £100,000 of losses which could have been used to halve the amount of Corporation Tax due in 2021.

So, whilst the R&D claim did generate a benefit of £33,350, it lost the company a future benefit of £19,000, which the specialist consultancy firm did not take into account when calculating their fee.

We don’t believe this is a fair practice and so only ever base our fees on the additional loss created by the R&D claim.  In the above example, we would have invoiced the company for £3,770 (£130,000 @ 14.5% @ 20%).

Both ways of charging are at 20% but produce very different fees!

If you have any questions on this blog or anything R&D related, please contact us at info@randdconsulting.co.uk.

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