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 just tax refunds.
Our consultant, John Mapother, explains why you can still make a claim.
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 to you. The R&D costs may mean that your company is now loss-making. You may then either carry forward the loss or claim a cash credit of 14.5%. You can still 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 that 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 provides tax credits, not tax refunds, and these are calculated in one of three ways.
Another misconception we have encountered is that the R&D process actually makes them loss-making. This issue often arises with companies that have been claiming for several years and when there is a lack of coordinated thinking within an agency. The problem is that carrying a loss forward yields a higher benefit rate (19%) than cashing it in (14.5%). Therefore, the common advice is to carry the loss forward and aim for the higher rate.
However, the client will not receive any immediate or future cash benefit while the loss is carried forward. In such cases, particularly when the client usually claims a similar amount each year, we recommend choosing the lower rate to realise a cash benefit now.
