Essential Guide to R&D Tax Credits for Loss Making Companies

15 August 2024

Did you know that even if your company is operating at a loss, you may still be eligible for R&D tax relief? Explore the world of R&D tax incentives for financial losses, how they may benefit your company and how you can get started on compiling a successful claim.

The power of R&D tax credits extends well past profit, as the significant tax incentive has the power to encourage even loss making companies to continue investment in innovative research and development. 

So to help loss making companies navigate the complicated world of R&D tax relief, we wanted to provide a simple guide that highlights the benefits, explains the impacts, explores state aid, and dissects the process of claiming R&D tax credits. 

Defining Loss Making Companies

When it comes to what a loss making company actually is, the definition is pretty straightforward. Essentially it’s a company that has incurred a tax loss during an accounting period. 

This happens when a company’s allowable expenses exceed its taxable income, which results in a negative taxable profit, often known as a tax loss. 

How Can a Loss Making Company Benefit From R&D Tax Credits?

Although a loss making company may be operating within a tax loss, those that have invested in qualifying research and development activities may benefit from R&D tax credit relief. 

While navigating the financial difficulties often related with loss making companies, R&D tax credits offer a range of benefits designed to support the company’s innovative prowess. Some of these benefits include relief that improves cash flow, and even funding for further research and development projects.

Additional benefits can include:

• Potential to reduce future tax liabilities
• Improved financial stability for early start growth
• Monetisation of tax losses

The fact that R&D tax credits don’t require immediate profitability, ensures that loss making companies are able to continue to invest in innovative efforts without feeling a major financial burden. 

What’s the Impact of R&D Tax Credits on Future Profitability?

As loss making companies can experience a range of benefits from their participation in research and development, questions arise about the long term impact that R&D tax credits may have on those making successful claims. 

The truth is, this tax relief is designed to aid innovative companies, and in order to do just that, the relief sets up a range of positive impacts that support claimants, for example:

• Deferred tax benefits
  Loss making companies can reduce future tax bills by carrying losses forward, which instils long term tax benefits
• Improved cash flow
  By receiving a cash refund due to R&D tax credits, loss making companies can improve their current cash flow
• Potential for enhanced growth
  By effectively utilising R&D tax credits, companies can harbour an innovative environment that will likely lead to increased market competitiveness

What Effect Does State Aid Have on R&D Tax Credits?

Innovative companies that are currently operating at a loss, may feel the need to offset the financial burden of research and development with additional grants and aid. Ultimately this raises questions about how state aid and grants may affect R&D tax incentives. 

While this additional funding may have a significant impact – especially for SMEs – here are five things that companies must consider when looking to combine funding with R&D tax credits:

1. Subsidised R&D
   Research and development projects that receive grants or state aid may be considered as subsidised R&D – meaning the project may not be eligible for R&D tax credits under the SME scheme, but they may still qualify under RDEC
2. Impact on R&D tax credit rates
   When a research and development project is partially funded by a grant or state aid, only the portion of qualifying expenditure not covered by funding may be eligible for R&D tax relief under the RDEC scheme under a lower rate
3. Eligibility considerations
   As not all additionally funding is classed as state aid, it is necessary to understand the nature of the grant in order to determine its impact on R&D tax credits, something that our experts may be able to help with

In order to maximise the benefits of R&D tax credit relief, it is necessary for companies to strategically plan their financial capabilities in relation to research and development projects. 

How to Apply for R&D Tax Credit Relief as a Loss Making Company

Before applying for R&D tax credits, it’s important to note the eligibility criteria as set out by the reliefs governing body, HMRC. 

HMRC defines research and development as a project that aims to scientifically or technologically solve an uncertainty that an expert in the field cannot overcome. This means that your project must set out to use science and/or technology to solve a problem within your industry. 

Often the outcome of research and development projects will produce one of the following in order to help advance their industry: 

• Product
• Software
• Service

Given that the official definition of research and development is so vast, the majority of industries are able to benefit from the R&D tax credit incentive. 

What is Included in R&D Expenses?

One of the most important parts of an R&D tax credit claim is the calculation of eligible expenditure. Depending on the requirements of the research and development project and the size of the company, qualifying expenditure for R&D tax credits include: 

• Direct R&D staff costs (including NIC and pension)
• Externally provided R&D staff costs
• Subcontracted R&D
• Consumable items (including materials and some utilities)
• Software used directly in R&D
• Clinical trial volunteers
• Contributions to independent research
• Prototypes 
• Collaborative working

Using this list of qualifying expenditures, companies can use an R&D tax credit calculator to determine the worth of their claim. 

What Documents Are Required in an R&D Tax Credit Claim?

In order to receive R&D tax relief, it is important that companies provide a range of documentation that supports the claim. To effectively support the claim, HMRC recommend that submitted documentation includes the following:

1. Project descriptions
2. Financial records
3.  Technical reports
4. Tax computation
5. Supporting documentation

In addition to this, we recommend that companies bolster their claims with additional information that may provide more insight into the project.

Final Thoughts

To summarise, claiming R&D tax credits as a loss making company can have a great impact on financial stability – not only in the accounting year for which the claim is made, but for years to come. 

Having the ability to offset tax credits against future tax payments may help a loss making company develop a sustainable financial position upon which they can continue to fuel innovation. 

How Alexander Clifford Can Help Submit R&D Tax Credit Claims? 

As leading R&D tax credit consultants, our experts work closely with clients to compile robust claims that stand up to scrutiny. With over 2,400 successfully submitted claims, we make sure to simplify the claims process while maximising the benefit. 

That’s what makes Alexander Clifford your trusted choice for R&D tax credits. What’s more, beginning your claim has never been so simple – just fill in the contact form below, and get a call back in 15 minutes.