R&D Tax Credits - Surrendering Loss

Question asked by Dave Freel 6 years ago

Hey guys,

We recently successfully applied for R&D tax credits against our 2012 loss - This involved us surrendering the loss in exchange for cash.

My question is how do we reflect this in ClearBooks - Since the loss has been surrendered it can no longer be offset against future profit for CT purposes so should no longer be included in the historic retained earnings

Thanks in Advance,

21 Replies

I've never done an R&D claim personally so this is something i'd have to get my head around at some point.

Key point here is most likely understanding there's a big difference between what goes on the tax computation (for CT purposes) and the P&L balance within the accounts/CB.

My gut would be:

  1. To represent the physical cash changing hands now: DR Bank CR other income (with income later reversed on tax comp as R&D cash not a taxable receipt for SME's)
  2. Come year-end, next tax comp will reflect the fact the historic R&D claim is no longer being c/f thus no further CT relief being available

I could be VERY wide of the mark though so please don't quote me, just throwing it out there.

Where's Paul Scholes when you need him eh....

Hi Dave,

If this is on a bank statement you will have to delete the item first. Then please create a journal which debits the bank account and credits capital. If you wish to credit a different account, please consult with your accountant to see which would be the best option.

Many Thanks

Chris

Hey Chris,

My problem isn't with adding the actual credit - My question is that we have surrendered our Historic Retained Earnings in order to get it and this needs adjusting accordingly

If we don't adjust the Retained Earnings then we start posting profit Clearbooks will be offsetting the retained loss against the profit - When there actually isn't any loss to offset as its been surrendered - And for pure reporting purposes we shouldn't have retained loss appearing on the balance sheet when we won't have any anymore

Best,

Hi Dave,

In that case, the best way to deal with this would be to create to separate journals.

Journal 1 would Debit - Bank and Credit - Shares or Capital - Using today's date

Journal 2 Using the same figures you would Debit Capital/Shares and Credit Retained Earnings. This will need to be dated as of the last day of the accounting period when the loss occurred.

This should clear the amounts and make all the figure correct.

Chris

I've never done an R&D claim personally so this is something i'd have to get my head around at some point.

Key point here is most likely understanding there's a big difference between what goes on the tax computation (for CT purposes) and the P&L balance within the accounts/CB.

My gut would be:

  1. To represent the physical cash changing hands now: DR Bank CR other income (with income later reversed on tax comp as R&D cash not a taxable receipt for SME's)
  2. Come year-end, next tax comp will reflect the fact the historic R&D claim is no longer being c/f thus no further CT relief being available

I could be VERY wide of the mark though so please don't quote me, just throwing it out there.

Where's Paul Scholes when you need him eh....

Just spoke to an R&D specialist, seems my best guess was spot on!

Yes, spot on.

There has actually been years of debate over the accounting treatment of R&D tax credits, do you treat them as a reduction in the company's tax bill (below the line) or treat them as if they were a government grant, used to offset the R&D expenditure (above the line).

As Kevin says, the company's accounts deal in factual profits & losses, including the receipt of government grants & incentives, whereas the taxable profit will ignore any items of untaxable income or expenditure. So, as Kevin says, treat the credit as other income.

Hey guys,

Thanks for all the info - I'm not concerned about our CT return being inaccurate as HMRC has all the relevant information already, just trying to get CB to reconcile!

If I were to debit Bank and Credit Shares as suggested this wouldnt clear the whole historic earnings. Using example numbers, we surrender 100k loss in exchange for 20k cash, so the journals would still leave -80k in retained earnings to be offset against profit which is incorrect - Unless I'm missing something?

Best,

Hi Dave

I'm afraid you are missing something.

Re Clear Books - all you need to do is credit the amount to other income then let your accountant take care of it on the CT comp come year end.

This exercise doesn't have anything to do with clearing the historic retained loss in terms of P&L - the P&L represents the facts during any two dates, the tax comp deals with the level of CT you pay which is what the R&D cash exchange relates to.

That -£80k loss will sit there until you turn a profit i'm afraid.

Hey Kevin,

I'm not trying to clear it on P&L - That absolutely should stay as it reflects our submitted accounts. I'm trying to get the balance sheet to be as true a representation of the situation as possible - So far as I know the only reason historic retained earnings account only exists to off-set against future profit, which has essentially already happened so the retained earnings should be zeroed?

Am I worrying about something I don't have to and should just forget about it?

You've surrendered those losses for CT purposes only, not in accounting (balance sheet) terms - the two are completely different. The R&D claim on the CT computation will be amended this year to show what's happened but none of this goes near the accounts (P&L, balance sheet etc). Retained earnings on the balance sheet will stay as they are.

Literally, the only thing you need to do in terms of Clear Books is pop that cash credit into other income and you're done. Presumably your accountant's up to speed on it all anyway but if not make sure you notify him/her of what that other income part relates to when he's drawing up the next year-end.

Just to give a brief example of how the figures on the balance sheet and those on the CT comp can be completely different:

Accounts:

Sales 100,000 Expenses 25,000 Profit 75,000 (this would then be the retained earnings on the balance sheet)

CT comp:

Profit as per the accounts 75,000 Plant and machinery capital allowances claimed 100,000 Loss of 25,000 for CT purposes

So as you can see, the accounts show a retained profit of £75k but the CT comp a loss of £25k. It's important to understand this difference because your R&D claim formed part of the CT comp, not the accounts. Now you've relinquished the right to those R&D losses, it's the CT comp that will need amending, not the accounts (balance sheet).

Aaah that makes sense! Huge thanks for the clarification, appreciate your time :)

Pleasure - it's been a selfish worthwhile learning curve on my part! I've just talked another accountant through it all too so you've actually made me look a tad smarter than I was this time yesterday!!

Did my first one for a client last year, or rather they got PwC to help with the claim itself and I re-did the CT return and squared the books. Straightforward once you get your head around it (I won't tell you how long that took). When you think about it, increasing retained earnings by the 100k losses surrendered would have a nonsensical effect on the availability of profits for the payment of dividends. It's only tax losses surrendered to gain the tax credit, not actual losses. Those actual losses still all need to be made good before you can pay a dividend. Life could go horribly wrong if you misunderstand that! The actual R&D tax credit does of course increase profits available for distribution (or make them less negative), as this is genuine income.

Hey guys,

This issue is rearing it's head again - We are about to pay our first round of dividends as we are in profit this year - Yet the Clearbooks dividend tool still considers us to be in loss due to retained earnings - Any advice?

You do need to look at your cumulative profits in order to decide if you can legally pay a dividend. If you are profitable this year but that profit isn't enough to wipe out the losses brought forward and then some you cant pay a dividend. The safest way is to start with the P&L reserve carried forward in last year's statutory accounts, as your accountant will have crawled over that, and then estimate likely profit after tax in the current year to add on to it. The tax bit isn't straight forward, as you need to look at brought forward tax losses (not trading losses) and consider things that might affect your tax bill like disallowable expenditure and capital allowances/balancing charges. It really is safest to discuss this with your accountant, the ClearBooks dividends tool is only fit for use by the simplest business in my opinion (contractors for example), for anyone else it is plain dangerous if they don't get advice. The payment of dividends also needs to be considered in the light of other personal income so you understand the tax implications for you as an individual, for example what level of dividend will push you into higher rate tax on your self-assessment return. Just because profits may be available in the company to withdraw, it doesn't mean that paying a dividend is always the best thing to do. It this sort of stuff where accountants earn their keep :-)

Sorry Stephen just read your post above mine - It's my understanding that as our actual loses have been offset by our Share Premiums than the profit made over and above that is available for dividend?

Hi Dave - if I'm understanding you right, you have retained losses b/fwd but these are counteracted by share premium on the balance sheet and you have since made profits that you want to distribute.

If so then I'm afraid that, as CB & Stephen say, you can not pay divs until the retained losses are covered by current profits. The reason is that share premium is a non-distributable reserve, if it was you'd merely transfer it to profit & loss hen it first arose.

You can't distribute share premium as dividends as this is a non-distributable reserve. So the share premium account can't be used in your calculations of profits available for distribution as a dividend. If you think about it, it wouldn't make much sense if you did, as dividends are taxable income for the shareholder whereas the return of capital invested shouldn't be should it. You can access the money in the premium account however by means of a capital reduction, which involves a statement of solvency to the creditors. Again that makes sense, as there could be circumstances when the reduction in capital makes the business insolvent if the cash is being used, for example, to fund working capital.

I haven't personally gone through this with a client, so can't really say much about the capital reduction process. Others here may be able to give indicative advice (which is all you'll ever get on a forum like this!), but really you need to talk to your accountant. Even if (like me) he hasn't done this before, if you're on a fixed fee plan with him you might as well make him do the research! He'll learn something he can sell to others, and will take extra special care to make sure he gets it right due to his lack of experience. Win-win!

Hi again, as Stephen says, the only way to get your hands on the Share Premium is by way of share capital (and premium) reduction. The process itself is far simpler now than it used to be but, again as Stephen says, the consequences and tax treatment of the released funds need to be fully discussed with an expert.

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