Even if you’re a loss-making company, you might be able to claim R&D tax credits from the Government. This could be up to 27% of your qualifying spend, depending on the scheme.
From April 1, 2024, a single merged RDEC scheme replaces the SME scheme, with Enhanced R&D Intensive Support (ERIS) offering up to 27% relief for qualifying R&D-intensive loss-making SMEs.
Loss-making companies that are not eligible for ERIS will see rates decrease, while those claiming under the new merged R&D Expenditure Credit (RDEC) scheme will receive a taxable 20% credit (16.2% after tax).
This article explores these changes, including how loss-making companies can optimise their claims under the new schemes.
In this article:
Additional tax relief for some R&D-intensive loss-making SMEs
What is an R&D-intensive SME?
An R&D-intensive SME is a loss-making SME with a qualifying R&D expenditure that is at least 40% of its total expenditure (30% for accounting periods on or after 1 April 2024).
How much can an R&D-intensive SME receive?
An R&D-intensive SME can claim a higher payable R&D tax credit rate of 14.5% (rather than the reduced 10%).
This means that loss-making R&D-intensive SMEs will receive a cash credit of £27 for every £100 spent on R&D expenditure instead of the reduced rate of £18.60 available to non-R&D-intensive SMEs.
How will this be delivered?
For accounting periods up to 1 April 2024, as part of the existing SME scheme. Following this, it will be called the ERIS scheme, which will run parallel to the merged RDEC scheme.
When might the merged RDEC scheme be a better option for loss-making SMEs?
While the ERIS scheme offers attractive benefits for loss-making R&D-intensive SMEs, there are situations where claiming under the merged RDEC scheme might be more advantageous.
- Low trading losses: If your trading losses are relatively low, the ERIS benefit might not be significantly higher than the merged RDEC scheme. In fact, the ERIS benefit can be as low as 12.47% in cases where the trading loss is minimal. In some cases, the merged scheme might even offer a better outcome, providing a consistent 16.2% benefit.
- Predictable future profitability: If you anticipate returning to profitability in the near future, the merged RDEC scheme’s above-the-line credit could be more beneficial for attracting investors and improving your financial reporting.
- Simplicity: The merged RDEC scheme has a simpler calculation process compared to ERIS, which might be preferable for some companies.
It’s essential to carefully assess your company’s specific circumstances and consider the long-term implications before deciding which scheme to claim under.
How loss-making companies receive their R&D credit
If you are a loss-making company, how you will receive the SME R&D tax credit will also be affected. Whereas profit-making companies receive a deduction from their Corporation Tax bill, loss-making companies can receive a partial or full cash credit for their R&D expenditure.
Alternatively, loss-making companies can choose to carry forward their losses to a future profitable year. This may make sense if your future profitability is predictable, as the return can be higher than if you receive a cash credit; however, for most loss-making companies, immediate cash credit is preferred. Returns from carried forward losses can reach 20% of the enhanced R&D expenditure, whereas the cash credit is delivered at a rate of 14.5%.
Under the merged RDEC scheme, loss-making companies will also receive a cash credit, but it remains taxable income, with a net benefit of 15%. For SMEs eligible for ERIS, the benefit can be significantly higher at up to 26.97%, depending on trading losses.
Choosing to take the immediate cash credit, rather than carrying the loss onto your future tax bill, is called “Surrendering the Loss“.
For more information about how your R&D tax credit is calculated, we recommend looking over our guide to how much you can claim. Otherwise, get in touch with one of our team, and they will be able to advise you free of charge.
Should you surrender your R&D tax losses?
Loss making companies can either surrender their R&D tax losses for an immediate cash payment or carry them forward to offset future profits. The key difference is the cash credit rate:
- Surrender the loss gets you 14.5% cash credit on qualifying R&D expenditure under the SME scheme (pre-1 April 2024) and the ERIS scheme for R&D intensive SMEs.
- Carry the loss forward gets you 20% credit once the company becomes profitable under the merged RDEC scheme (from 1 April 2024).
If you’re considering surrendering losses under the merged RDEC scheme, you can’t surrender losses for cash. Instead the credit will be applied to future profits at 20%.
Understanding the Trade-Off
- Immediate cash flow: Surrendering the loss gets you immediate cash but at a lower rate (14.5%) under the SME scheme and ERIS scheme.
- Carrying forward losses: Under the merged RDEC scheme, loss-making companies can’t surrender losses for immediate cash. The credit is carried forward at 20% once the company becomes profitable.
When Surrendering Makes Sense
- High-Growth Companies: Fast-growing companies (e.g. 100% year on year) may benefit more from surrendering losses for immediate cash.
- Minimal trading losses: Companies with smaller losses may find the 14.5% cash credit more immediately beneficial.
- Need for immediate funds: Companies needing funds for R&D or operations may prioritise cash now over future savings.
When to consider carrying forward losses
- Predictable profitability: If profitability is expected soon, carrying the loss forward under the merged RDEC scheme gives you a higher benefit (20%).
- Slower growth: Companies with slower growth may not see a big difference between surrendering the loss and carrying it forward.
Making the right decisionIt’s up to your company’s growth and financial needs. For high-growth companies surrendering may be more valuable, for others carrying the loss forward under the merged RDEC scheme is more valuable.
Discover your new estimated claim value with our R&D calculator
The rates for loss-making companies have seen significant shifts in recent years. The adjustments were made in April 2023 and have been revised once more as of April 2024 due to the merging of the scheme. If you are an R&D-intensive loss-making SME leveraging the new ERIS scheme or a loss-making company claiming through the new merged RDEC scheme, your claim will have changed.
Whether you know your previous claim value or not, our R&D tax calculator provides an estimate and shows how these changes will affect your claim for accounting periods in 2023 and from 1 April 2024—try it now to get an accurate view of your potential claim value.
