This is a question that comes up a lot. The quick answer, if a client is making a loss, yes they absolutely can claim R&D tax relief (as long as they’re eligible 😉). But many businesses aren’t claiming because they don’t realise that even if they’re not turning a profit, they are entitled to R&D tax relief.
The truth is the cashflow benefit is actually greater for loss-making SME’s. Here’s the numbers:
Loss If a company has made a loss then HMRC will make a cash payment to them of up to 33.35p for every £1 spent on R&D activities.
Profit If a company has made a profit then HMRC will make a cash payment to them of up to 24.7p for every £1 spent on R&D activities.
It may be the case that your client was making profits prior to the R&D claim but following the application of the tax relief the business is now making a loss (from a tax perspective). In these circumstances, the amount of R&D benefit they receive will sit somewhere between the ranges set out above depending on their specific circumstances.
Examples: For Diagnostax Customers, you can access worked examples for loss-making businesses claiming R&D Tax Relief, in the R&D download area (see R&D Eligibility Tax Toolkit).
Quick recap
R&D tax relief was introduced by the government to support and incentivise innovation amongst small and medium-sized UK businesses. A company can claim cash payments of up to 33% of the costs incurred on activities that are considered eligible and these funds can be used for any purpose including the payment of dividends!
All businesses are potentially eligible to claim the relief, provided funds have been spent on developing new or existing products, processes, and other technologies.
To make a claim, a business must:
Make a considerable improvement to existing technology
This does not always mean it is ground-breaking or innovative work. If a business is working to make its product, services, or processes, faster, less expensive, or better in some way, then this may be eligible for R&D tax relief.
Overcome technical challenges
Find out more about R&D Tax Relief here. Have a client?
Perhaps you’ve previously looked at R&D Tax Relief for a client, but you weren’t 100% sure about the rules. Get in touch, it takes a quick 15-minute call to find out if they could be claiming.