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How to bring forward your R&D Tax Credit

Updated: Oct 17, 2023

There are many reasons why a client might want to fast forward their R&D Tax Credit, one of the most common reasons we see is when a company is experiencing cash flow issues. With the backlash of Covid-19 and the relentless lockdowns, businesses have been hit hard, it’s hardly surprising cash flow is on every business owners mind. Imagine if you could help your clients by bringing forward their R&D Tax Credit?

Let us explain how this works, so you can reach out and help your R&D clients who are in need of a cash flow boost.

The Timeframes

Let’s start with a quick recap on the timeframes. The hard and fast deadline for making a claim is 2 years after the end of the accounting year in which the business incurred the costs. If they don’t claim within that 2-year window, they’ve missed out and there is no way to claw it back. Which no client wants, so the basics are fundamental.

R&D tax claims are made via the company’s tax return which covers the same period as the company’s accounting year. Now forgive us for teaching granny suck eggs here, but you can only prepare and submit the accounts and tax return after the end of the accounting year. This means in theory the earliest a business can make an R&D Tax Credit claim is the day after the end of the accounting year.

Now we have the fundamentals, how can a business bring forward their R&D tax credit?

Shortening the Company Year End

Companies House automatically sets a company year-end based on the last day of the month the business was incorporated. But it can be changed. Option 1….shortening the year-end.

If your client is experiencing cashflow issues, shortening the company year-end to bring the R&D Tax credit forward could be a way to get money back into their business faster. This could be a genuine lifeline for some businesses. Here’s an example.

A Software Company with a June year end has R&D costs of £100k and total losses of £100k up to 31 March 2021. However, they have forecasted their spending to be significantly less up to June.

As a result, they decide to shorten the year-end by nine months, bringing it forward to 31 March 2021. By doing this they can now submit an R&D Tax Credit claim of £33,350 to HMRC, three months earlier.

There’s no limit

There’s actually no limit on how often a business shortens its accounting period year-end. If a business is expecting a fairly sizable credit, they could bring the year-end - and claim - forward by 6 months, say from September 2021 to April 2021, getting the cash back into their business by the June. They could then bring it forward again to September and get even more cash into their business.

The only thing to be mindful of is the additional accounting fees associated with shortening the accounting period but these are likely to be minimal for the client in comparison to the benefit of the cash to their business. Don’t hold back suggesting this due to the worry of additional fees, if a client could benefit, at least give them the option.

There’s more….Advance Funding

There are lending companies that will lend a business up to 50% of their tax credits up to six months before the end of their accounting year. This could have a huge impact on a business. The lender would need to perform due diligence and eligibility assessment, to determine just how much they could lend. If they agree to provide the funding the money is transferred, and when HMRC pays out, the R&D credit is used to repay the debt.

Here’s an example:

A Manufacturing company has been claiming R&D Tax Relief for three years and each year they get approximately £100k back from HMRC.

They have a June year end, but their accounts and tax usually take nine months to finalise.

Advance funding is available in Jan 2021 for the June 2021 year-end, which would otherwise only have been received in around May 2022. This effectively brings the cash flow forward by 16 months, with only the financing cost to the client.

Get your accounts filed promptly

We don’t have to tell you this (sorry) but the earlier the business get can get all the necessary company information to you, the quicker they can get R&D Tax Relief claim processed. We can’t do one without the other. But this one requires teamwork, we work with all our partners to help them get that information together on time.

Radish Tax, Your R&D Tax Relief Service

If you have R&D-eligible clients that are in need of a cash flow boost and you’re not sure how to tackle this for them, we can help. Simply book in a call.

Radish Tax by Diagnostax is a specialist R&D Tax Relief provider. Find out more about Radish Tax by Diagnostax.

Please note, as this blog was published prior to 1st April 2023, there is no reference to the changes which have been brought into place for the R&D tax relief schemes.

For expenditure on or after the 1st of April 2023, the following changes in rates of relief apply:

SME – the Enhanced Expenditure uplift rate has fallen from 130% to 86%; and the tax credit rate has fallen from 14.5% to 10% (exc. R&D intensive loss-making SMEs).

RDEC – the credit rate has increased from 13% to 20%.

Further, data and cloud computing costs can now be included within the claim qualifying expenditure calculation. Pure mathematics now falls within the scope of the relief.

For submissions on or after the 8th of August 2023, it is now required for an Additional Information Form to be submitted prior to submission of the R&D claim. For reference, please see our blog here.

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