How R&D tax credits can unexpectedly bring businesses into QIPs

Why R&D credits can bring tax payments forward

Research and Development Expenditure Credits (RDEC), now claimed under the merged R&D scheme, are recognised as taxable income. They also count towards the profit measure used to determine whether a company must pay corporation tax through QIPs. This applies to the expenditure credit only. Loss-making R&D intensive companies claiming enhanced support (ERIS) receive an additional deduction rather than a taxable credit, so are not affected in the same way.

The usual annual profit threshold is £1.5 million, although this is lower where there are associated companies or a shorter accounting period. Exemptions can apply. In particular, a company crossing the threshold for the first time does not usually pay by instalments in that year, provided its profits do not exceed £10 million (again reduced for associated companies). For many growing businesses, the squeeze therefore arrives in the second year above the threshold.

Credit income can therefore take a business above the relevant threshold even where its underlying profits remain below it. The result may be instalments beginning during the accounting period, rather than a single payment nine months and one day after its end.

There is a further complication. An anticipated R&D credit cannot simply be deducted when calculating instalments. The company may need to fund payments before its claim has been submitted and the credit applied. The credit also increases the profit on which those instalments are based. Once the claim is made, the credit is set against the liability and any overpaid tax is repaid, but repayment interest is not usually due because the credit is treated as applied on the date of set-off.

Why younger businesses can feel the pressure

A young business can be profitable while still having limited cash available. Recruitment, equipment and product development may absorb much of what it earns, while customer payments and investment funding arrive on different schedules.

Earlier corporation tax payments introduce another demand on that cash. Money allocated to the next development milestone may suddenly be needed elsewhere.

In our view, this interaction works against the purpose of an innovation incentive. Businesses need to understand when support will become available, as well as its value. An unexpected funding gap can disrupt investment even if the eventual tax position is unchanged.

What should change from April 2027

The government plans to exclude Research and Development Expenditure Credits, Audio-Visual Expenditure Credits and Video Games Expenditure Credits from the QIP threshold calculation from April 2027, through secondary legislation amending the definition of augmented profits. Draft regulations have not yet been published, so the precise start date, and which accounting periods the change will cover, is still to be confirmed.

For businesses brought into instalments solely because of those credits, this should make the problem temporary. However, the proposed change will not remove the taxable status of the credits or resolve every timing mismatch for companies that remain within QIPs.

It is a welcome correction. Until it takes effect, the interaction between R&D claims, corporation tax deadlines and available cash remains an important part of understanding a business’s funding position.

Understand the impact on your business

Unexpected tax payment deadlines can put growth plans under pressure. Speak to Gravita’s corporate tax and R&D teams about how expenditure credits affect your payment timetable and what the planned changes could mean for your business.