Can I claim R&D tax credits even if my SME business is making a loss?

In this blog, we take a look at the R&D claim process for those SMEs who are currently making a loss.

A common misconception about R&D tax credits is the idea that your business must be profitable for them to be worthwhile.

Often businesses fail to make a claim for R&D tax relief because they are loss making and therefore don’t believe there will be any benefit. This is not the case.

If your business is a loss-making SME

SME R&D tax credits offer an enhanced deduction for R&D expenditure. R&D expenditure already attracts tax relief as part of the normal operational costs of a business. The R&D tax credit claim then allows a further 130% of this eligible R&D expenditure to be deducted when calculating the profits of the business.

The way that this helps profitable companies is obvious – rather than paying tax on their taxable profit, they pay less tax on a diminished (or potentially eliminated) profit. However, the scheme also allows companies to do something with the loss that’s generated. One option is called ‘surrendering’ the loss.

Simply, any loss generated by the scheme can be surrendered for cash. This means that the loss is not carried over to future years, and instead you get some cash for it right now. This can be music to the ears of many loss-making cash strapped start-ups.

How does surrendering the loss work?

A loss-making company with an estimated R&D spend of £250,000 could claim up to £83,375 as a tax credit.

The £250,000 is ‘enhanced’ by 130%, so the enhanced expenditure becomes £575,000 (£250,000 plus 130% x £250,000). The surrender rate is 14.5%, which equates to £83,375 which can be paid in cash.

Does the loss have to be ‘surrendered’?

No. Loss making SME companies also have the option of not surrendering the R&D loss but instead carrying the loss forward or backwards against profits.

We would gain a full understanding of your company’s past and future position in order to maximising the benefit of your R&D claim and establish how R&D tax credits are best utilised in your loss making business.

It’s likely a significant number of loss making companies are not fully utilising R&D tax credits and associated tax relief. Contact our experts for more advice.