R&D Tax Credits for Loss Making Innovators
Many clients and prospective clients wrongly believe that they are unable to make an R&D Tax Claim because they made a loss and didn’t pay any tax in the financial year. We're pleased to say that this is NOT true. Why? Because the HMRC scheme pays tax credits, not tax refunds.
What are the rules for loss-making companies?
Once we have identified the qualifying costs, they are uplifted by 130%. This figure is then used in your corporation tax computation as a cost, which reduces the amount of tax due. If you have paid corporation tax for the year you are claiming for, a portion or all of this will be repaid back to you. The R&D costs may put your company in a loss position. You may then either carry forward or surrender the loss for a cash credit of 14.5%. You can still make a claim if you were already loss-making before the R&D figures were applied, as some or all of the loss can be cashed in at 14.5%.
Loss-Making Misconceptions
Many clients and prospective clients wrongly believe they cannot make an R&D Tax Claim because they made a loss and didn’t pay any tax in the financial year. We're pleased to say that this is NOT true. Why? Because the HMRC scheme pays tax credits, not tax refunds, and they are calculated in one of three ways, shown above.
Further incorrect advice we’ve come across is that R&D can send a client into a loss-making position. This issue tends to occur with companies that have been claiming for a number of years and when there is a lack of joined-up thinking within an agency. The problem is that carrying a loss forward attracts a higher rate of benefit (19%) than if the loss is cashed in (14.5%), so often the advice is to carry the loss forward and go for the higher rate.
The result, however, is that the client will not see any cash benefit now or in the future, for as long as the loss is carried forward. In these instances, and especially where the client is typically claiming around the same amount each year, we advise taking the lower rate in order to realise the cash benefit now.
