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Markel Tax

28 Jul 2020

Innovating but making losses? R&D Tax Relief is here to help!

It is still a common question - ‘I’m making a loss so surely I can’t claim?’

You do not need to be profitable and paying corporation tax in order to benefit from R&D tax relief. Many businesses, especially innovative start-ups, are still put off from exploring their eligibility for a claim as they think the scheme won’t apply to them.

In fact it has been specifically designed to provide assistance to those in the early stages of development. Those incurring significant costs on activities which are yet to realise their commercial potential can gain significant support from the scheme.

SME Scheme

Under the SME scheme, a qualifying company which is making a loss can opt to use their losses to claim a cash tax credit, which is then paid to them by HMRC.  The amount received is determined by applying the SME tax credit rate of 14.5% to the surrenderable loss for the period. For companies making large losses an R&D claim can result in a business recovering up to as much as 33.35% of their qualifying expenditure as a tax credit.

The losses created do not have to be used to generate a tax credit. There are still the options to either carry the losses forward to reduce future profits or carry them back to a previous accounting period. In the latter they could be used to generate a repayment, which can provide another cash boost to an innovative company. This can prove to be more advantageous than claiming a tax credit. The savings achieved when using additional losses against profits are at the corporation tax rate of 19% rather than the tax credit rate of 14.5%.

For companies who are part of a group, the additional tax losses created by an R&D claim do not have to remain within the claimant company. These can be utilised in the same ways as any other trading losses and surrendered to other companies in the same losses group as group relief. They cannot be used to generate a tax credit in another group company but can be used against any available profits.

However, there is a restriction for those companies who are part of a consortium rather than a losses group. In this case losses cannot be surrendered to another company within the consortium if they are not also an SME.

RDEC  Scheme                                                                                                                                       

Larger companies claiming under the RDEC scheme also have the chance to benefit in a loss making scenario. With the increase to the RDEC rate to 13% since 01 April 2020, it is now possible to receive as much as 10.53% of eligible expenditure back as a cash tax credit.

This benefit is reduced from 13% due to a ‘notional tax’ element which is applied within the calculation of the above the line RDEC credit. However, the remaining amount not received as a tax credit can be carried forward to a future accounting period and used directly against future tax liabilities when they arise.

There is also further good news for companies within a group, who are able to surrender this restriction to another company within the group that is liable for corporation tax. This means the benefit can be realised in the same accounting period as when the claim is made.

Loss making companies do not be discouraged!

Those companies taking both the financial and technical risks associated with innovation are vital for the government’s vision to encourage science, research and innovation within the economy. The R&D scheme is designed to encourage greater R&D spending and it is there to help!

For further information and support regarding R&D claims, please contact Justine Dignam or Beverley Beck at Markel Tax on 0333 920 5708.

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