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Should my client surrender losses for an R&D tax credit?

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Advising your client on how best to utilise the tax benefit from an R&D tax relief claim can be complicated, especially when it comes to surrendering losses for a tax credit. Here’s our quick guide on what you need to consider.

What is an R&D tax credit?

Put simply, an R&D tax credit is a cash payment given by HMRC to loss-making companies that surrender losses generated by the R&D claim rather than carrying the losses forward to future tax years. Guidance on how to calculate a tax credit is given here, but essentially a company calculates the amount of losses they can surrender and is then given 14.5% of this amount back in cash.

Why not take the cash?

Why not take the cash?

For a loss-making company, the relatively quick and easy injection of cash received through an R&D tax credit can be a no-brainer – why on earth would they choose anything else? However, there are a few things to consider before committing to taking the cash:

Could the company carry the loss back?

Could the company carry the back the loss?

If the company made a profit and paid corporation tax in the previous tax year, it might be better for them to carry the loss back and get a rebate on tax already paid.

Is the company part of a group?

Is the company part of a group?

If the company is part of a group and another member of the group is in profit and likely to have a large corporation tax bill, it could be that using group relief rules to surrender the losses to the profitable company is more beneficial.

Is the company likely to make large profits in the near future?

Is the company likely to make large profits in the near future?
If the company knows that it is likely to make a large profit in the following tax year, carrying the losses forward to reduce future tax bills could be the best course of action.

However, if the answer to all of the questions above is no, then it’s likely that the company would benefit most from taking the R&D tax credit and enjoying the cash boost!


What’s the difference in benefit?

So, what does this all mean in terms of actual difference in tax benefit? Well, this depends on both the profit/loss position of the company, and whether the losses can be used as above.

Imagine Company A has £100,000 of eligible expenditure. How would its tax benefit differ for different profit/loss positions and for the scenarios given above?

Table of an example of different profit/loss positions

*Remember that in this scenario, the company has already had a tax benefit of £9,500 by reducing their taxable profits to £0.

Looking at the table above, it again seems like a no brainer to always carry the losses forward or back or utilise group relief. However, if a company is deciding between carrying losses forward or taking the tax credit, there’s one more thing to consider – would a smaller amount of cash now be worth more than a slightly larger amount of cash in the future?

Consider a fast growing start-up company investing their tax credit in more R&D, for which they expect an internal rate of return of 50%. In the first scenario above, the £11,600 tax credit is worth £17,400 in a year’s time, significantly more than the benefit of carrying the losses forward!

How to write an R&D tax relief technical narrative

With HMRC’s new mandatory requirement for project descriptions on all submissions, we wanted to share our experiences to help others to write their best possible technical narratives.

Available to download here.

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