Turn business losses into financial gains with R&D tax credits

As an R&D Tax Advisor at MPA Group, I have the opportunity to inform clients of the outcome of their R&D tax credits and overall tax benefit. It’s a great to be a bearer of good news in relation to tax especially when so often the benefits of the R&D claim go well beyond the client’s initial expectations. Just last week, I was pleased to inform a client that they would be receiving a cash tax credit of over £80,000. That’s right, I had the privilege of saying “HMRC is going to pay you £80,000 following your R&D claim”.

I also manage enquiries from clients, some of whom have raised concerns about the impact declaring a business loss after an R&D claim could have on future financing options. The thought of having to register a business loss, especially when you need to consider how to finance your company, can be daunting to say the least. Many worry about how that loss will affect their credit rating and ability to secure finance in the future, however not all losses are bad; below I will explain how many companies have improved their eligibility for finance with R&D tax credits.

Gaining with a loss

In today’s ever-changing finance market, when a company seeks to borrow funds and explore wider finance options many aspects of a company’s financial profile can come under scrutiny, such as loan amount vs. turnover, liquidity, overall payment history, and not just their taxable profit / loss at the bottom line.

With standard SME R&D claims, companies can deduct an additional 130% of qualifying R&D expenditure from their taxable profits on the tax computations. Taking the same form as a capital or any other allowances claim, this would mean a straight deduction from profit, reducing Corporation Tax liability. In the instances where there is no Corporation Tax liability and losses are created, there is a possibility of surrendering R&D losses in exchange for a payable cash credit, currently set at 14.5% of the surrendered losses.

An example of the R&D cash benefit

Such an injection of cash could be used as a down payment on a significant asset purchase or to settle day to day liabilities, which would otherwise affect the company’s financial profile.

An integral part of any finance application, the cash injection of an R&D credit will strengthen the overall cash flow position and associated statements. In cases where an R&D claim solely reduces profit, it also reduces the Corporation Tax liability as mentioned earlier, providing some valuable breathing space by avoiding the need for a large one-off payment to be made to HMRC.

Payable tax credits such as R&D form part of a company’s income (which is non-taxable) and where R&D projects are continuing over a number of years, some financial institutions may take any future payable cash tax credits into account in support of an application.

With such benefits its surprising that more companies aren’t taking advantage of R&D tax credits to strengthen their position, should borrowing be required in the future.

Every day we at MPA Group help numerous companies unlock valuable reliefs available to them; get in touch today to discuss your individual circumstances.

Connor Whelan, Tax Advisor at MPA Group