Is it really worth the effort to make an R&D Tax Credit claim if my company is making a loss? We get asked this question so many times that we decided to put our answer on paper. The basic answer is, yes, you still get a high value R&D tax credit claim if your company is not profitable.
What are the R&D tax credit rates?
For SMEs, the rate of R&D tax relief is 33% for loss making companies and 26% for those in profit. So your claim is actually worth more if you are not in profit.
What is the R&D tax credit calculation for profitable businesses?
If you have a profitable business, then your R&D tax credit amount ‘enhances’ your overall R&D expenditure. Bringing down your taxable profit figure, therefore reducing how much tax you actually pay.
The actual figure is based on how much you spent on eligible R&D projects. HMRC call this your ‘qualifying expenditure’.
So companies that are profitable use R&D tax credits to reduce their total taxable profit, sometimes bringing it right down to zero.
Is this calculation the same for non profitable businesses?
Calculating the ‘qualifying expenditure’ for non profitable businesses is the same. But then you ‘surrender the loss’ for a cash lump sum, instead of carrying the loss forward into future financial years. This is particularly useful for start ups that expect to make a loss, but could really use the cash injection for their next innovations.
What about the fine print?
As you would expect, there are some HMRC details to bear in mind as you prepare your R&D Tax Credit claim.
It is an anomaly of the scheme that the closer you are to breaking even, the worse a return you get on your R&D Tax Credit claim.
This is best explained by an example.
A company has £10k qualifying expenditure. The enhancement rate is 230%, the surrender rate is 14.5%. They also have £10k tax loss. So, the expenditure enhanced by the 230% takes it to £23k (£10 + £13). Alongside their £10k loss, they can surrender the entire £23k at 14.5%, resulting a nice cash sum of £3.33K.
A company without the £10k loss, but also with £10k qualifying expenditure has a £13k loss after their R&D enhancement. This is all they can surrender. £13k loss at 14.5%, gives a much less satisfying £1.88k.
Previous years’ losses not carried forward cumulatively
HMRC’s calculations involve putting the R&D tax credits figures first, followed by any losses from former financial years. You can apply a portion of previous losses to take your profits to zero, once the R&D enhancement is applied, and then carry the rest forward to future years. The potential to use your losses to your advantage isn’t lost, but it’s not as good as cash for immediate investment.
Cap on loss making companies
HMRC have reintroduced this old regulation in order to combat those committing tax evasion using the R&D Tax Credit Scheme. Yet again, the actions of the few spoil things for the many. A loss making company’s claim may only be up to three times the amount of NICs and PAYE payments it has paid.
Your future innovations can definitely benefit from an R&D Tax Credit claim, even as a loss making company. It is worth the effort to investigate how much you are entitled to, we can help with the rest of the process. We can identify your eligible R&D activities and maximise your qualifying expenditure total.
No need to struggle with the small print yourself, we will advise you on the best way forward for your business. Just don’t dismiss the R&D Tax Credits scheme because you are currently making a loss.