My Client's Company Has Made A Loss. Can They Still Claim R&D Tax Credits?

28th Feb 2020
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The research and development (R&D) Tax Credits scheme was unveiled 20 years ago to incentivise innovative companies via the UK tax system. Although it has been popular and highly lucrative over the years, unfortunately many companies are still missing out. Often this is because they believe their work isn’t innovative or expensive enough, or that they’re in the ‘wrong’ sector. In fact, the scheme is open to any UK company that’s subject to Corporation Tax, and all that’s required is an appreciable scientific or technological step forward. This could be either involving the creation of a new product or process, or in upgrading an existing one.

The way the scheme works is by offering companies engaging in R&D work help with the cost, either as a reduction in their Corporation Tax, or a single cash payment. The scope of eligible activities is massive, and companies can claim relief for their last two completed accounting periods. A rate of 100% relief is also offered for Capital Allowances on capital expenditure used for R&D purposes.  This provides full tax relief in year one on costs which may only otherwise obtain relief at 18% per year, or sometimes attract no tax relief at all.

Why is the government so keen for small and medium sized enterprises (SMEs) to innovate and grow in particular?

Low unemployment rates are the linchpin of a stable, productive UK economy. Everyone relies on being able to earn a wage in order to sustain themselves, and thus the cycle continues with money flowing round the economy.

Another key thing the government is interested in is GDP (or gross domestic product). It’s a big factor in consumer spending, and is also one of the main indicators used to measure the nation’s economic health. Investors won’t invest and business won’t meet customer demand if the public isn’t spending. A lot hinges on the success of the country’s army of SME to thrive and grow.

SMEs: The facts

SMEs themselves currently contribute to around 60% of all UK jobs, and employ approximately 16.3 million people. In fact, over the last 5 years alone it’s been reported that 2 million jobs have been created in this country thanks to small and medium sized businesses. SMEs are also particularly effective in supporting local economies and are therefore particularly encouraged in areas of higher unemployment. They bring a renewed sense of innovation and prosperity to places that need it most, generating income and wealth - and of course a higher tax take.

It’s clear that SMEs make up a huge proportion of all UK businesses across a vast range of industries. With this in mind, it’s no wonder the government has pledged further support in the years to come.

Qualifying R&D projects and costs

The kinds of projects that qualify for R&D Tax Credits are wider in number than many companies first realise. It’s not just about technicians and big pharmaceutical companies - in fact any innovative work in any sector could well be eligible. Essentially, if your client’s company has paid people to solve a particular scientific or technical problem involving an element of risk, then a claim is likely to follow. Even if a project was started but then abandoned later on, or it was completed but didn’t achieve the results that were hoped, the innovative work involved is again likely to be eligible for R&D Tax Credits.

However, confusion can often come when looking at qualifying costs. It is therefore vital to understand not only what the relevant costs are, but how to account for them correctly.

Relevant expenditure that can be included in an R&D tax relief claim may include the following:

  • Staff costs (including wages, salaries, employer’s NICs and employer pension contributions. However it excludes benefits in kind)
  • Payments to agency staff, subcontractors, freelancers and volunteers for clinical trials
  • Consumables like energy, materials, water, fuel, tools and prototypes directly used up in the course of the R&D project
  • Some types of software

My client's company has made a loss - does that mean they're ineligible to claim R&D Tax Credits?

No, it doesn’t. If your client has made a loss they can choose to carry back the R&D enhanced loss to the prior year, if they made a profit previously. As an alternative, they may choose to carry it forward for offsetting against profit made in future, or surrender it for group relief. Both options can generate a benefit in the form of a Corporation Tax saving or as a cash rebate. Which one best suits your client depends on their company’s financial landscape. If cash flow is not too much of a concern for your client, they may decide to carry the benefit forward as it would be worth more to them in future if/when they become profitable. However, companies that are struggling may wish to take the money now as a lump sum, especially if it’s unclear whether profitability will ever occur.

The value of the credit depends on whether the company is an SME claiming under the SME scheme, or a larger company claiming under RDEC. A loss making SME can receive relief worth between 14.5% and 33% of its R&D expenditure. For subsidised SMEs or larger companies, the relief could amount to 9.7%.

To find out more about what defines an SME and a larger company and how it relates to an R&D Tax Credit claim, see our recent blog post on the subject or have a look at our R&D Tax Credits webpage.

How the Tax Cloud portal can help your clients secure a claim

At Tax Cloud we only deal with R&D tax relief. We have worked alongside clients and company accountants for nearly two decades in creating their R&D tax relief applications, optimising their claims and avoiding the many pitfalls. Our Tax Cloud portal was also designed to help accountants, helping you in identifying your clients’ costs and providing support.

We’re ready to assist you in offering the best possible service to your clients. So why not call us today on 0207 118 6045 or use our contact page and see what we can do.