If your company has been making a loss, it’s still worthwhile making a claim for R&D tax credits. Sometimes this is misunderstood with people thinking a company needs to be profitable to benefit. However, applying as a loss making company can provide significant and quick cash returns for your work.
How much cash can be claimed by loss-making companies?
A company can receive a payable tax credit, which is effectively a cash or cheque payment directly to them. This is worth up to 33p per £1 spent on qualifying R&D costs.
E.g. A qualifying cost of £100,000 on R&D activities can generate a cash payment of £33,350. The Company can still benefit - even if they have never made a profit or paid any corporation tax! However - there is a limit to this payout that might apply to some companies.
Is there a cap on the tax credit for loss-making companies?
When a company is taking a payable tax credit there is a cap that recently came into force that can limit the amount.
The cap is calculated as £20,000 plus 3 x the company's PAYE and NI contributions. Companies with small annual payroll amounts are more likely to be restricted in their tax credit claim.
How loss-making companies receive their R&D tax credit
If a business is loss-making, there are two options for receiving benefit from an R&D tax credit claim.
A company can choose to use some of its claim (technically the losses arising from the claim) for taking a payable tax credit and can carry some losses forward.
For example - if they are affected by the payable tax credit cap - they can take the maximum allowable payable tax credit and carry forward their remaining losses to a future tax year. This will allow them to benefit from a payable tax credit now, and a reduction in corporation tax in the future.
How to choose between carrying losses forward and taking a payable tax credit
Let’s look at an example where a company has spent £100k on R&D and is deciding between surrendering their losses or carrying them forward:
The company's trading losses have increased by £230k as a result of applying the R&D tax credit to their £100k investment in R&D. They can now choose between surrendering this £230k loss for a payable tax credit - or carrying it forward. To understand how these calculations work - check-out this blog.
The decision about how this company uses their R&D tax claim will depend on a few things:
These factors will be the same for all companies making this decision. The right answer will always depend on the context of the business. Professional and competent R&D advisors will help you make the right decision for your business, by guiding you through this decision.
Need help or have any questions?
When making an R&D claim, employing the services of a specialist advisor will ensure you get the best possible results. At Zest R&D we specialize in preparing and submitting R&D claims. Our priority is ensuring your R&D tax claim works for you. If you are considering making a claim for R&D tax relief or would like to discuss the status of an existing claim, please don’t hesitate to get in touch.
Find out how how companies can meet the deadlines for R&D tax credit claims and all the key R&D tax relief changes coming into place in 2023.
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