Definition
Notional tax is a deemed tax deduction applied to an above-the-line R&D credit under RDEC and the merged scheme. The pre-tax credit is reduced by a notional tax charge at the main corporation tax rate before it can be surrendered for payment by a loss-making company. The notional tax mechanism prevents a loss-making company from receiving a larger cash amount than an equivalent profitable company, which would pay corporation tax on the credit in its P&L.
How HMRC defines it
HMRC guidance on notional tax is at CIRD89800 for RDEC and CIRD90430 for the merged scheme. The legislation is at section 104N of the Corporation Tax Act 2009 for RDEC and its equivalent in Chapter 1A of Part 13 for the merged scheme. The deemed rate is the main corporation tax rate in force in the accounting period.
Practical example
A loss-making company has a £100,000 above-the-line credit under the merged scheme in its year ended 31 March 2025. The notional tax deduction at the 25% main rate is £25,000. The net credit available for surrender, before applying the PAYE and NIC cap, is £75,000.