SME R&D Enhanced Expenditure and 1 April 2023 changes

Hi

I’m looking at establishing the correct Corporation Tax treatment in relation to the enhanced deduction for SME R&D tax relief. Sage Corporation Tax adds back the net R&D expenditure, before deducting both the enhanced amount and the net expenditure incurred, i.e. addback of 100% and then a further deduction of 186%/230%. However, within this process the profit/loss after the net expenditure has been added back is time apportioned between tax years.

 

I’m aware other software has simply left the original expenditure amount as is, and then deducted the enhanced amount i.e. 86%/130%.

 

As far as I’m aware, historically either method resulted in the same outcome as the rates were consistent in each tax year (130%). However, with the rate change on 1 April 2023, the above calculations now result in two very different outcomes for an accounting period that straddles 1 April 2023.

 

It is my understanding that the correct treatment would be to simply deduct the enhanced amount, as that is what the legislation refers to (CTA 2009, S1044). Can you confirm if Sage follows a piece of legislation which supersedes this, or whether there is an intention to update the software to reflect this treatment?

 

Do let me know if you need any further information to assist with the above.

 

Kind regards

Tom

  • 0

    Hi Tom,

    Thanks for using Community Hub.

    The following page of the Help Centre covers this topic, I hope it's useful: R&D Expenditure >

    If that helps, please click Verify Answer.

    Regards,

    Andy
    Sage UKI

  • 0

    Hi Andy

    Unfortunately this link does not provide an answer to the above question. It is a technical question around how Sage has applied to the legislation in respect of SME R&D expenditure.

    Kind regards

    Tom

  • 0 in reply to Tom Elsbury

    Hi Tom, thanks for coming back. We're sourcing an answer from our Product team, I'll post another reply as soon as I have more information.

    Andy

  • 0

    Hi Tom,

    This is the reply received from the Product Team, I hope it's helpful:

    In a period that straddles a rate change it is necessary to establish how much of the qualifying R&D expenditure was incurred before the rate change and, therefore, how much was incurred before the rate change. Furthermore, in a long period of account, it is necessary to apportion the profit/(loss) on ordinary activities before tax, normally on a time basis, between the two accounting periods. There is no apportionment between tax years as tax years are not generally relevant to CT. Neither is there is any apportionment between financial years at this stage although when looking at taxing any profits this will be relevant.

    If we take as an example an accounting period (AP) starting 01/01/2023 and ending 31/12/2023 (which is also the period of account, so we can ignore any need to apportion the profit/(loss) on ordinary activities before tax).

    Lets say there is qualifying R&D expenditure of £100,000 and that is the only expenditure in the AP and there is no turnover or other taxable income. So, we have a loss on ordinary activities before tax of £100,000.

    In order to establish the additional deduction that is available (CTA 2009, s1044) on the qualifying R&D expenditure of £100,000, we need to know how much of the £100,000 was incurred before 01/04/2023 and therefore how much was incurred after 31/03/2023. Note: This is done in SCT by the user entering the relevant amount in R&D Claim screen for each amount allocated from the Profit and loss account.

    We will assume that £40,000 of the £100,000 was incurred before 01/04/2023 and which attracts an additional deduction of 130%. Therefore £60,000 of the £100,000 was incurred after 31/03/2023 and which attracts an additional deduction of 86%.

    The trade result is as set out below. I have shown both methods to demonstrate that the end result is the same. Method 1 is what SCT does. 

    Method 1: Add back P&L a/c expenditure and deduct P&L a/c expenditure plus additional deduction

    Loss before tax                                       (100,000)

    Add: R&D expenditure in P&L a/c                                                       100,000

    Deduct P&L a/c expenditure plus additional deduction:

    Expenditure before 01/04/2023

    Expenditure                         40,000

    Additional deduction (130%)             52,000   92,000

     

    Expenditure after 31/03/2023

    Expenditure                         60,000

    Additional deduction (86%)               51,600  111,600        (203,600)

     

    Adjusted loss                                         (203,600)

     

    Method 2: Deduct additional deduction

    Loss before tax                                       (100,000)

    Deduct additional deduction:

    Expenditure before 01/04/2023

    Expenditure 40,000

    Additional deduction (130%)             52,000

     

    Expenditure after 31/03/2023

    Expenditure 60,000

    Additional deduction (86%)               51,600                  (103,600)

     

    Adjusted loss                                         (203,600)

     

    If this helps, please click Verify Answer.

    Regards

    Andy
    Sage UKI

  • 0 in reply to Andy Rickeard

    Hi Andy/the product team

    Thanks for the detailed response, though I would disagree that the two result in the same response. They do when looking at the totals for the claim period, but the results can deviate significantly when you look at what has happened in the pre/post April period and what is available as a surrenderable loss. Whilst not shown in the scenario below, you can often encounter a situation whereby you have profit in one portion of the period, and a loss in the other portion.

    I have included an example below using the same figures as you, though I have gone into further detail as to what is happening in each portion of the period and what is available to be surrendered/carried forward.

     

    Scenario 1
    Tax Years 01/01/2023 31/03/2023 01/04/2023 31/12/2023 Total
    Days in each tax year 90 275 365
    Loss incl net R&D expenditure -24,658 -75,342 -100,000
    R&D Expenditure incurred 40,000 60,000 100,000
    Profit /w R&D expenditure added back 15,342 -15,342 0
    Time apportioned P&L 0 0 0
    Enhanced R&D Expenditure 92,000 111,600 203,600
    P&L /w enhanced R&D deducted -92,000 -111,600 -203,600
    Surrenderable loss 92,000 111,600 203,600
    Tax Credit 13,340 11,160 24,500
    Credit rates 14.50% 10.00%
    Loss to carry forward 0 0 0

    Scenario 2
    01/01/2023 31/03/2023 01/04/2023 31/12/2023 Total
    Days in each tax year 90 275 365
    Profit incl net R&D expenditure -24,658 -75,342 -100,000
    R&D Expenditure incurred 40,000 60,000 100,000
    Enhanced R&D Expenditure 52,000 51,600 103,600
    P&L /w enhanced R&D expenditure -76,658 -126,942 -203,600
    Surrenderable loss 76,658 111,600 188,258
    Tax Credit 11,115 11,160 22,275
    Credit rates 14.50% 10%
    Loss to carry forward 0 -15,342 -15,342

    I hope the above is helpful in demonstrating my point but do let me know if it would be easier to schedule a call to discuss this.

    Kind regards

    Tom

  • 0 in reply to Tom Elsbury

    Hi Tom, I've some more information for you about this, I've sent you a direct message.

    Andy

  • 0

    I would like to add to this in that Sage does not appear to be compliant with CIRD90500 as far as apportioning the loss goes.

    https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird90500

    I have spoken to HMRC and they have confirmed the loss in a company with a year end running from 1/1/23 - 31/12/23 does need to be apportionned i.e. 90 or 275 / 365 x the loss for the year. Sage just compares the surrenderable loss for the full year to the total enhanced expenditure - it does this automatically and there is no scope to overwrite the calculation. We have put the same data for a client with an unfiled SME R&D claim on Sage, into Xero tax, and Xero tax is arriving at a repayable claim tens of thousands of pounds lower due to a restriction of the loss in the first 3 months due to the loss being larger than the first 3m of enhanced expenditure. This is a really big problem and we will need to go back over our last year of claims through Sage and assess for non-compliance. I called the Sage helpline today and the advisor remoted on to my screen to compare Xero Tax, Sage Tax and looked at the HMRC link. Their response was "you are using the most up to date software version which has been out for more than a year and we have not received any complaints so we believe we are correct"!!! Er, sorry, what now?

  • 0 in reply to CKP

    Hi CKP. I'm happy to compare notes if that would at all be helpful. Following the above thread, Sage did admit they had to create a resolution to fix the software and how it was computing the above. This update was released at the end of April. Let me know if you want to connect and we can discuss this further. Cheers, Tom

  • 0 in reply to Tom Elsbury

    That would be great Tom. We have the data on the Sage Cloud software. I am assuming the update you mention was to this and not Sage Corporation Tax Desktop (we use both). We are on the latest versions of everything but if there is a workaround, please let me know.

  • 0 in reply to CKP

    We're on a desktop version of Sage Corporation Tax and it is this software which is used. The above thread went into emails and I was sent a link direct from Sage with the update, though I presume it's available on their website somewhere? If you're on LinkedIn, feel free to connect with me and we can continue the conversation and also compare the calculations, if that would help.

  • 0 in reply to Tom Elsbury

    If it helps, I've just checked our version number on Sage CT and we're on 5.0.1.14263

  • 0 in reply to CKP

    Hi CKP,

    Thanks for using Community Hub.

    I have raised this with the relevant team for review, they advise that any changes that may be required will be included in the next update.

    Regards,

    Andy
    Sage UKI