This has always been a key question and now more than ever with the dual headwinds of COVID-19 and Brexit hitting UK businesses. The one word answer which you will not see in most marketing around R&D claims is “NO”. The slightly longer answer is that an SME R&D claim will nearly always bring in cash. But a few circumstances exist where it will not. It depends on the tax position of the company in several respects plus the scheme being claimed under.
Small & Medium Enterprise (SME) R&D claims.
An SME is defined here.
As with a lot of terminology “bring in cash” requires expanding upon. If a claiming company owes HMRC money, then the cash generated by an R&D Tax Credit claim will be offset by HMRC against the amount owed. It can be debated if this is a cash benefit. But as it pays off a liability the business faces it is reasonable to view it a cashflow benefit even though the business might never be in control of the cash. Another rare situation where cash will not definitely be forthcoming is if a company is under tax investigation. It is HMRC policy not to pay out R&D claims until an investigation is complete. The investigation could be about any element of a businesses tax affairs or specific to an R&D claim.
No minimum qualifying expenditure requirement exists for R&D claims that are currently claimable through the company tax return. A cap existed prior to April 2012 but as claims must be made within two years of an accounting period end that is irrelevant to new claims.
Profitable company with no brought forward or back losses.
In this situation a company will always gain a benefit from an R&D claim. If corporation tax on the profit has already been paid then a claim will generate a repayment. If a claim is made before corporation tax is paid it will reduce or even eliminate completely the cash outgoing to pay the tax. Clearly not having to pay tax due is as much of a benefit to cashflow as bringing cash in.
Company that is loss making after the R&D enhanced deduction.
At present an R&D Tax Credit (Which is a cash payment gained by surrendering losses) will always be available as is the option to carry back or forward losses for full tax relief if profits exist in the preceding year or following years to relieve. Tax Relief at 19% is always generates more cash than surrendering a loss for an R&D Tax Credit at 14.5% if it is available. R&D Tax Credits are only available if after an R&D enhanced deduction a company makes a trading loss. A cap on payable R&D is currently under consultation and may be brought in for accounting periods starting after 1st April 2021. The proposed cap on a payable tax credit is 3 times a company PAYE+NIC in the claim accounting period.
The only situation where an SME might not get any cash benefit is if a profit exists that is fully relieved by brought forward or back losses or charity relief. In these cases, all an R&D claim will to is replace the losses used to relieve the profits. The R&D deduction comes earlier in the tax computation than the application of these other reliefs. All the R&D claim does is preserve losses which has the impact of increasing the losses that would otherwise be used up.
Charity relief is particularly tricky as charity relief cannot be carried forward so if R&D relief replaces it no loss is preserved. This is the only situation where an SME R&D claim generates nothing that could be viewed as a benefit. But substantial company charity donations are rare unless a company is a not for profit.
Are increased losses a bad thing in R&D terms?
Not if a company makes future profits and they can be used for tax relief. While it is another debate a “generally profitable after R&D deduction company” that has one loss making year might be better off not taking the available R&D Tax Credit and carrying losses forward for tax relief. A loss is surrendered for 14.5% of the loss for an R&D Tax credit while Tax Relief is worth at present 19%. The key metric in this decision is the likely future profitability of the company and the amount of tax losses it carries. For example, a company that makes a £100k profit which is its best performance in years, but even after relieving that profit has over £1million in losses, might see no value in an R&D claim that led to an additional deduction of £100k or less. More tax relief might be a bit like buying a lottery ticket – unlikely to pay off. But a company with the same profit regularly and only £100k in existing losses for tax relief might see value in making an R&D claim and creating more as they would have a near term history of gaining value for losses.
To add a complication in certain situations an SME might claim under RDEC (The R&D scheme for large companies). These are Grant funded R&D and the situation where an SME acts as a subcontractor for a large company. RDEC is more complicated in terms of a multi step calculation than an SME claim. But briefly an RDEC is offset firstly against Corporation Tax due, and if any remains due is capped by the company PAYE & NIC on R&D staff. So a company with no taxable profit and no PAYE+NIC on R&D staff will not generate cash but the RDEC can offset other tax liabilities. If any RDEC remains it is carried forward as RDEC and must go through the same steps again in the next year.
It is always difficult talking about tax calculations in a blog. The takeaways from this blog should be:
- The company tax position matters in terms of the cash benefit of an R&D claim. This should be considered before any time and effort is devoted to making a claim.
- The benefits from an R&D claim can be significant. Immediate cash is clearly desirable but sometimes carrying forward losses brings a greater benefit in a reasonable timescale.
R&D claims are worth getting right. Please contact us today for a no obligation free assessment.