Once we have identified the qualifying costs, they are uplifted by 130%. This figure is then used in your corporation tax computation as a cost, which reduces the amount of tax due. If you have paid corporation tax for the year you are claiming for, a portion or all of this will be repaid back to you. The R&D costs may mean that your company is now loss-making. You may then either carry forward, or surrender the loss for a cash credit of 14.5%. You can still make a claim if you were already loss-making before the R&D figures were applied, as some or all of the loss can be cashed in at 14.5%.
Even if you are loss making you can still claim R&D Tax Credits. In fact you can receive up to 33% of your costs!
R&D Tax Credits for Loss Making Innovators
Many clients and prospective clients wrongly believe that they are unable to make an R&D Tax Claim because they made a loss and didn’t pay any tax in the financial year. We're pleased to say that this is NOT true. Why? Because the HMRC scheme pays tax credits, not tax refunds.
Our consultant, John Mapother, explains why you can still make a claim.
What are the rules for loss-making companies?
There are three different scenarios for calculating your R&D Tax benefit, dependent on whether you are profit or loss-making:
Profit Making
Original Profit: £200,000
Tax Due (19%): £38,000
Qualifying Costs: £100,000
Uplift: £130,000
Profit after R&D: £70,000
Tax Refunded: £24,700
Profit to Loss
Original Profit: £100,000
Tax Due (19%): £19,000
Qualifying Costs: £100,000
Uplift: £130,000
Profit after R&D: £-30,000
Tax Refunded: £19,000
Loss cashed-in @14.5%: £4,350
or Carry forward loss to be utilised @ 19%
Loss Making
Original Loss: £-200,000
Tax Due (19%): £0
Qualifying Costs: £100,000
Uplift: £130,000
Loss after R&D: £-330,000
As the new loss is greater than the sum of the qualifying costs + uplift, the total enhanced R&D figure of £230,000 is applied
Tax credit @14.5%: £33,350
Loss-Making Misconceptions
Many clients and prospective clients wrongly believe that they are unable to make an R&D Tax Claim because they made a loss and didn’t pay any tax in the financial year. We're pleased to say that this is NOT true. Why? Because the HMRC scheme pays tax credits, not tax refunds, and they are calculated in one of three ways, shown above.
Further incorrect advice given to clients that we’ve come across, is when the R&D actually sends them into a loss-making position. The issue tends to occur with companies that have been claiming for a number of years and when there is a lack of joined-up thinking within an agency. The problem is that carrying a loss forward attracts a higher rate of benefit (19%) than if the loss is cashed in (14.5%), so often the advice is to carry the loss forward and go for the higher rate. The result however, is that the client will not see any cash benefit now or in the future, for as long as the loss is carried forward. In these instances, and especially where the client is typically claiming around the same amount each year, we advise taking the lower rate in order to realise the cash benefit now.
If you would like more advice on this, please get in touch here.