Whatever your financial position, working with an R&D Tax Credits consultancy will help you maximise your claim size. Here’s how.
‘I don’t qualify for tax credits. I’m unprofitable!’ Some companies think this, but it’s just not true.
It doesn’t matter whether you’re profitable, loss-making or breaking even; you could obtain substantial funding through R&D Tax Credits.
You just have to be innovating. And, ideally, working with an R&D Tax Credits consultancy that really knows what it’s doing.
A good R&D Tax Credits provider will know how to make the most of whatever situation you’re in to generate the largest possible windfall. Here are three examples of companies in very different financial positions, and what we’d do in each case to maximise their claim.
Example 1: Starting Out
Company A is a new startup. It was founded in FY17, just two years ago. Despite its youth, it has grown quickly. After making a loss in its first year, it turned a decent profit by the end of FY18.
In FY19, Company A decided to apply for tax credits for R&D it had conducted over the last two years. Smartly, it has approached an R&D Tax consultancy to handle its claim.
Let’s look at a possible cash situation.
Company A’s Financial Results
| Reporting | FY20 | FY21 |
|---|---|---|
|
Profit / Loss |
(£30,000) |
£100,000 |
|
Corp. Tax Liability |
£0 |
£20,000 |
|
Profit / Loss After Tax |
(£30,000) |
£80,000 |
|
Qualifying Expenditure |
£10,000 |
£12,000 |
An R&D Tax Credits consultancy would do a few things for Company A. But first, a clarification: qualifying expenditure is the money a company invests in tax-credits-eligible R&D. This includes spending on things like staff, subcontractors and consumables.
Under the R&D Tax Credits scheme, companies can artificially increase their qualifying expenditure by a certain amount, the enhancement rate, which right now is 230%. This is called R&D enhancement.
So if, say, a developer was working on an R&D project, and their time spent on the project was worth £10,000, we would enhance this amount by 2.3x, to £23,000.
This is a key tactic consultancies use, which ultimately reduces a company’s profitability and/or increases its loss. We’ll see why this is important in a second, but first, let’s look at Company A’s financials now:
Company A’s Updated Financial Results
| Reporting | FY20 | FY21 |
|---|---|---|
|
Profit / Loss |
(£30,000) |
£100,000 |
|
Corp. Tax Liability |
£0 |
£20,000 |
|
Profit / Loss After Tax |
(£30,000) |
£80,000 |
|
Qualifying Expenditure |
£10,000 |
£12,000 |
|
Enhanced Expenditure |
£23,000 |
£46,000 |
|
New Financial Position |
(£43,000) |
£74,000 |
As you can see, the enhanced expenditure has made Company A’s financial position worse (only in accounting terms, of course). So the company’s tax liability (20% of £74,000) has fallen to £14,800. This nifty £5,200 decrease is the R&D Tax Credit, which is worth 26% of the qualifying expenditure.
We’re not done yet, though. Because we know the company has gone from loss to profitability, we can use a tax management practice called carrying losses forward to, as it says on the tin, transfer some of Company A’s loss from FY17 to FY18. 20% of the loss can be carried forward, which equates to £8,600. Remember, this amount has been artificially increased by the expenditure enhancement.
So company A’s profits in FY18 are reduced by a further £8,600, to a new low of £65,400. Its corporate tax bill drops once again to £13,080, nearly £7,000 less than it was originally, before Company A hired an R&D Tax Credits consultancy!
Example 2: Strapped for Cash
Company B has been going for a while. It was profitable in FY17 and FY18, but barely.
Company B’s Financial Results
| Reporting | FY20 | FY21 |
|---|---|---|
|
Profit / Loss |
£5,000 |
£6,000 |
|
Corp. Tax Liability |
£1,000 |
£1,200 |
|
Profit / Loss After Tax |
£4,000 |
£4,800 |
|
Qualifying Expenditure |
£8,000 |
£9,000 |
Once again, we would first enhance Company B’s qualifying expenditure by 230%.
This would take FY17 and FY18’s enhanced expenditure to £18,400 and £20,700 respectively, creating the following financial position:
| Reporting | FY20 | FY21 |
|---|---|---|
|
Profit / Loss |
£5,000 |
£6,000 |
|
Corp. Tax Liability |
£1,000 |
£1,200 |
|
Profit / Loss After Tax |
£4,000 |
£4,800 |
|
Qualifying Expenditure |
£8,000 |
£9,000 |
|
Enhanced Expenditure |
£18,400 |
£20,700 |
|
New Financial Position |
(£5,400) |
(£5,700) |
Now, the company appears to be loss-making in both FY17 and FY18, meaning its corporate tax bill is reduced all the way down to zero.
We could now carry forward the loss from FY18 to reduce Company B’s tax liability in FY19 if it’s likely to make a profit. But the company is a little strapped for cash at the moment.
And we can help with that.
Instead of carrying the loss forward from FY18, we’re going to use an R&D Tax Credits mechanism called surrendering your losses.
This is where R&D-related losses can be converted into a cash credit worth 14.5% of the value of the loss.
So Company B would receive a cash lump sum worth £783 in FY17, and £826.5 in FY18. The overall R&D Tax Credits benefit to Company B – a combination of tax relief and cash credit – is worth £1,783 in FY17 and £2,026.5 in FY18.
It’s not much, but it could help the company fund further growth and become much more profitable in the future.
You can see here evidence of what we call ‘the valley of death’, where the closer you get to breakeven, the worse your R&D Tax Credits return becomes.
We don’t know why HMRC has configured the scheme this way. But the good news is that, even if you’re near breakeven, you could still be in for a decent sum.
Example 3: Fully profitable!
Things are ‘all systems go’ at Company C. It was very profitable in FY17 and 18, and expects to be equally as profitable in FY19. It’s also been investing heavily in R&D.
Here, our focus would be on making sure every penny of Company C’s qualifying R&D investment is accounted for. Then we’d enhance its expenditure to reduce its corporate tax bill by as much as possible. Here’s what that would look like.
Company C’s Financial Results before the R&D Tax Credits claim…
| Reporting | FY20 | FY21 |
|---|---|---|
|
Profit / Loss |
£900,000 |
£1,000,000 |
|
Qualifying Expenditure |
£300,000 |
£350,000 |
|
Corp. Tax Liability |
£171,000 |
£190,000 |
And after…
| Reporting | FY20 | FY21 |
|---|---|---|
|
Profit / Loss |
£900,000 |
£1,000,000 |
|
Qualifying Expenditure |
£300,000 |
£350,000 |
|
Enhanced Expenditure |
£690,000 |
£805,000 |
|
New Financial Position |
£510,000 |
£545,000 |
|
New Corp. Tax Liability |
£96,900 |
£103,550 |
|
Corp. Tax Saved |
£74,100 |
£86,450 |
For profitable companies, there’s a huge financial benefit of filing for R&D Tax Credits. But regardless of your situation, there’s a lot of room in the R&D Tax Credits scheme to get financial help.
Most companies don’t try these different techniques themselves, either because they don’t know about them, or they don’t understand them well enough and they don’t want to risk a fine from HMRC. That’s where an R&D Tax Credits consultancy can be of huge value.
Speak to an expert
If you’d like to understand how the R&D Tax Credits scheme could most benefit your company, give us a call!
Our team of tax credits and finance experts would be happy to talk your through the process, explain your funding options and answer any questions you might have.
