R&D Tax Credit Options For Loss-Making Companies

Research and Development (R&D) allows your business to launch new offerings or improve existing ones, with a goal to remain competitive, make profit and keep up with shifting customer needs and demands. What’s more, you can receive tax credit on the R&D that you execute – even if you are a loss-making company.

R&D Tax Credits

Although R&D can be time-lengthy and expensive, costs can be recovered with R&D tax credits, this includes the SME incentive and RDEC incentive for large companies. Costs such as staffing costs, consumables and software all qualify. Using R&D projections, you can analyse the total project cost against the qualifying costs for R&D tax credits to decide if the project is feasible.

R&D must be:

  • A Project – this can also include work undertaken for a client. Projects do not need to be successful to qualify
  • An Advancement – R&D has to seek an advancement in knowledge or capability in science or technology

R&D tax credits create a circle of innovation, you receive a benefit which you can then use to invest more in the innovation.

Loss-Making Company R&D

You can still claim R&D tax credits if you are a loss making company.

Applying for the SME R&D tax credit as a loss making company can be highly lucrative, as you can claim up to 33% of qualifying expenditure, whilst profit-making companies can claim back 25%.

Alternatively, using the RDEC scheme, will see a return of 13% regardless of the financial position of the company. This is, however, taxable, meaning it usually equates to 11%.

SME Loss-Making Company

Whilst profit making companies receive a deduction from their Corporation Tax bill, loss making companies receive a partial or full cash-credit for their R&D expenditure.

Loss-making companies can surrender their losses and have two options – carry forward the losses to a future profitable year, or receive a cash credit.

Carrying Forward a Loss

If your company has predicted future profitability, you can carry forward your loss and offset against your future profits.

This can generate a tax benefit in the form of a cash rebate for tax paid or corporation tax saving, meaning that the return from this option may be higher than if you receive a cash credit.

Cash Credit

You can receive a cash payment from HMRC in exchange for a surrender of your R&D enhanced losses. This method can be useful for companies that need a boost in cash flow, especially if your future profitability is unknown.

The cash credit is delivered at a rate of 14.5%. HMRC generally makes R&D tax credit payments within 28 days, not accounting for the additional 10 days that it may take for money to arrive in your bank account.

You can use this cash credit however you want; to hire new staff, buy new equipment, or even conduct more research and development work.

REDC Loss-Making Company

If you use the RDEC scheme, the effect of an R&D tax credit claim is different. There is a seven step process that you must follow, starting with paying any corporation tax liability for the current accounting period. Once you have completed the process, a cash credit may be paid out. 

RDEC large company claims generally take longer to process because they’re usually part of a more complex Corporation Tax return. 

We offer R&D consultancy. If you need help and support, get in touch with our specialised accountants at James & Uzzell today to see how we can help.