A question we get asked a lot is; is it really worth the time and effort to make a Research and Development (R&D) tax credit claim if my company is making a loss?

The simple answer is, yes, you can still get a high value R&D tax credit claim if your firm is not profitable.

What are the Research and Development tax credit rates?

The rate of R&D tax relief for SMEs is 26% for those in profit but 33% for loss making businesses, making your claim actually worth more if you company is running at a loss.

What is the R&D tax credit calculation for businesses in profit?

If you are fortunate enough to have a profitable business, then your R&D tax credit amount ‘enhances’ your total R&D expenditure. Reducing your taxable profit figure, decreasing how much you actually pay in tax.

The material figure is based on what HMRC call your, ‘qualifying expenditure’, how much your firm spent on R&D projects that were eligible for tax credit.

Companies that are profitable therefore use R&D tax credits to decrease their total taxable profit, often bringing it down to zero.

hmrc business tax credit

Is this the same for non-profitable businesses?

Yes, calculating HMRC’s, ‘qualifying expenditure’ for non-profitable firms is the same. But what happens is you, ‘surrender the loss’ for a cash sum, in lieu of carrying the loss forward into future financial years. This is very useful for start-ups many of which are expecting to make a loss but could really use the cash booster for further innovation.

What about the small print?

There are, as you would reasonably expect, some HMRC specifics to bear in mind as you prepare a R&D Tax Credit claim.

Breaking even. It is an anomaly of the system that the nearer you are to breaking even, the worse return you get on your tax credit claim.

For instance:

A business has £10000 qualifying expenditure. Enhancement rate is 230%. Surrender rate is 14.5%. The business also has a £10000 tax loss. Thus, the expenditure enhanced by the 230% takes it to £23000 (£10 + £13). In conjunction with the £10000 loss, they can surrender the entire £23000 at 14.5%, giving a cash sum of £3.33K.

A business without the £10000 loss, but also with £10000 qualifying expenditure has a £13000 loss after their R&D enhancement. This is the total they can surrender. £13000 loss at 14.5%, gives a much less gratifying £1.88K.

Previous years’ losses not carried forward

HMRC puts R&D tax credits figures first, followed by any losses from prior financial years. You can apply a portion of former losses to take your profits to zero, after the R&D enhancement is attached, it’s then possible to carry the rest forward into future years. The opportunity to use your losses to your advantage isn’t missed, it’s just not as good as cash for immediate re-investment.

business tax credits

Cap on loss making businesses

The government has reintroduced this regulation in an effort to combat tax evasion using the R&D Tax Credit Scheme. As always, the irresponsible and greedy actions of the few, spoil things for the many. A loss making firm’s claim can only be up to 3 times the amount of PAYE and NI contributions it has paid.

Even as a loss making company, innovations can definitely benefit from a R&D Tax Credit claim and it is always worth the effort to explore how much you are entitled to.

Maple Accountancy can help with the rest of the process. We can identify eligible R&D activities and maximise your qualifying expenditure.

There’s no need to struggle with the fine print yourself, as Maple Accountancy will advise you on the best path forward for your business.

Don’t dismiss the R&D Tax Credits scheme because you are currently making a loss, it could be to your advantage. Contact Maple today to find out more.