If I am a loss-making company, can I claim R&D tax credits or am I precluded as we don't pay tax?
The simple answer is: Yes, you can claim R&D tax credits if you are loss-making.
This assumes that you have carried out qualifying R&D for tax purposes but being loss-making or profitable in a financial accounting period makes no difference to your eligibility under this relief — it is designed to assist both.
Is an R&D Tax Credit claim worth it if my company is making a loss?
Yes, it is absolutely worth it as it can result in a cash credit from HMRC worth up to 33% of the qualifying expenditure for loss-making SMEs (whereas it is restricted to 25% of qualifying expenditure for profitable tax-paying companies). Yes, you actually get a better result if you are loss-making.
For large companies (or SMEs in receipt of subsidies such as grants), you can claim under the Research and Development Expenditure Credit ('RDEC') if you are loss-making (or profitable). Although the RDEC is less generous compared to the SME relief with an effective rate of 11% on qualifying expenditure.
How do you calculate the SME R&D tax credit for loss-making companies?
You may have seen that the headline R&D tax enhancement rate is 230% for SMEs and that loss-making companies can claim an R&D tax cash credit of 14.5%.
This means that companies with qualifying costs of say £100,000 will receive an enhancement or super deduction of a further £130,000 to provide an R&D enhanced deduction of £230,000 in total (i.e. 230%). Remember that this additional £130,000 or 130% is purely notional in that it is for the purposes of calculating the R&D tax relief only.
You can surrender the enhanced tax loss of £230,000 for a payable tax credit of £33,350 from HMRC (i.e. applying the 14.5% SME R&D tax credit rate).
You may note that the payable credit in our example of £33,350 is equivalent to 33.35% of our qualifying expenditure of £100,000 - this is the "short-cut" way of calculating the R&D tax credit return on qualifying expenditure.
Note that surrendering your enhanced tax loss for a payable credit rebate from HMRC is not the only way of securing tax relief as noted further below.
Can I claim an R&D tax credit on my enhanced tax loss where the loss was generated by the enhanced R&D tax deduction?
Yes, it can be quite common for a company that is otherwise profitable and tax-paying to be classified as a loss-making SME for corporation tax purposes after taking into account the additional deduction under the R&D tax relief.
Why is my R&D tax credit claim restricted compared to the full available enhanced R&D tax loss in certain circumstances?
Sometimes the amount claimable as a tax credit is less than business owners are expecting. Having calculated the total qualifying costs, they are sometimes confused as to how or why the R&D tax credit payable doesn't equate to 33%? This is due to the way in which the R&D claim is calculated.
The rules require that the company calculates the total (max) claimable amount as 14.5% of the enhanced R&D expenditure (i.e. 230%) and to compare this with the available tax losses in the period after taking into account the benefit of the R&D tax additional deduction. The company is eligible to claim whichever is the lower of the two figures. This is called the 'surrenderable loss'.
So taking the example of a company that is otherwise profitable (before taking into account the enhanced R&D tax deduction) and generates a tax loss (after taking into account the enhanced R&D tax deduction), it will be unable to claim a tax credit on the full R&D spend as a proportion of the enhanced relief will have been 'used up' sheltering the taxable profits - it may, however, be able to claim relief for corporation due or paid on the element of profits that were sheltered by the enhanced R&D relief.
To be able to claim an R&D tax credit on the full R&D spend, the company must have tax losses of at least the R&D spend equivalent before taking into account the benefit of the R&D enhanced deduction.
Can I still claim the R&D tax credit even if my company has not paid any corporation tax or PAYE?
Yes, there is no requirement for the company to have paid corporation tax before it can claim the R&D tax credit.
In fact, many start-ups claim this tax incentive as an important source of cash flow as they carry out the development stage work on their product or solution prior to commercialisation. The only requirement is that your company is registered with HMRC and completes an annual CT600 corporation tax return (the claim for R&D tax relief is included in this tax return).
There is a PAYE cap being introduced with effect for accounting periods beginning on or after 1 April 2021 that will limit the R&D tax credit rebate to £20,000 plus three times' the total PAYE / NIC for your company (subject to certain exceptions).
What if I don't want to claim the R&D tax credit - how else can I use my enhanced tax loss?
Claiming the R&D tax credit is an election. It is not mandatory.
There are a number of alternative tax planning options, some of which may give you a better overall cash and tax result, as set out below:
1. Carry the enhanced tax loss back to the prior accounting period - this should result in a better cash tax result compared to claiming the R&D tax credit as you should secure a corporation tax break at a rate of 19% (current prevailing corporation tax rate) as opposed to the current R&D tax credit rate of 14.5%. You may also be able to take advantage of the temporary extension to the loss carry back rules. This allows for the normal one-year carry back to be extenderd to three years for accounting periods ending between 1 April 2020 and 31 March 2022.
2. Carry the enhanced tax loss forward to offset against future profits and related corporation tax liabilities. As with the loss carry back option, carrying the losses forward should result in a better overall cash and tax result as you should be able to secure tax relief at a rate of 19% and up to 25% by 2023 (under current proposals).
3. If your company is part of a wider corporate group, it may be possible to surrender the enhanced tax loss to a fellow group company under the company tax 'group relief' rules. Again, this could secure tax relief at 19% as opposed to the 14.5% tax credit relief under current tax rates, so is likely to be the preferred option.
Although many companies default to claiming the payable cash credit, the above tax planning examples give you some idea of why it can be beneficial to engage experienced tax specialists, like IP Tax Solutions, to assist in ensuring that you have explored all angles to optimise your claim.