Q. I am preparing a claim under the merged RDEC scheme and understand that the credit is chargeable to corporation tax. How does this interact with trading losses brought forward or if there is a trading loss in the year? Can we surrender the losses for a cash payment?

A.Under the merged RDEC scheme, CTA 2009 section 1042H treats the R&D expenditure credit, generally 20% of qualifying expenditure, as a receipt of the trade concerned. It therefore adds the amount into the trading profits of the company to increase the taxable profits.

As the credit forms part of the trading profits, any brought forward losses can be utilised against the profits in the normal way, eg, by claiming for post-1 April 2017 trade losses to be offset under CTA 2010 s45A, provided the relevant conditions are met.

Unlike the old SME scheme (or the enhanced R&D scheme), there is no surrender of losses to obtain a cash payment to the company. If the company has a loss in the current year, the taxable credit will decrease the amount of the loss.

The net loss can then be utilised under the normal rules for trade losses, ie, offset against total profits of the current or previous period under CTA 2010 s37, group relieved, or carried forward to future periods.

The 20% RDEC credit is then used to reduce the corporation tax liability, to repay other company tax liabilities, group relieve certain elements, or to obtain a repayment in accordance with a seven-step process in CTA 2009 1042I.

The relief obtained for the credit does not impact the relief for the losses and any excess trading losses not otherwise used will be carried forward as normal to be available in future periods.

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For further guidance on the seven-step process, including examples of the RDEC calculations, see Croner Navigate Direct Tax In-Depth at 714-325.