How is the claim benefit calculated if my business is loss-making for an accounting period?

If your business is making a loss, you can claim R&D tax relief in the UK, which can help your cashflow and drive further investment in R&D projects. The benefit is calculated differently across both schemes, which is based on the size of your company and the nature of the R&D activities.

Once the qualifying Research and Development (R&D) expenditure has been calculated, it needs to be multiplied by 130% (for pre-1 April 2023 costs) or 86% (for costs relating to 1 April 2023 onwards); the resulting amount is utilised as a deduction in the computation and further increases the tax-adjusted trading losses.

SME Scheme

If your SME is loss-making, you can either carry forward your losses or surrender your losses in exchange for payable R&D tax credits. The surrender rate is 14.5% for SMEs pre-1 April 2023, although 10% from 1 April 2023 onwards. You will notice that the surrender rates are lower than the corporation tax rates. The SME scheme was designed by HMRC so that if you opt to receive the tax benefit now rather than in the future, there is a compromise in the amount payable to your business.

The number of losses available to surrender is the lower of: the unrelieved trading losses and the enhanced expenditure (which is the qualifying R&D expenditure @ 230%). After all, you can’t surrender more losses than what you have available! If your business has made a small trading loss during an accounting period, you may want to carefully consider whether it is worthwhile carrying forward those losses.

Example:

So, if your business’s qualifying R&D expenditure for a pre-1 April 2023 accounting period is £100,000, the additional deduction in the computation would be £130,000 and the enhanced expenditure would be £230,000. The enhanced expenditure of £230,000, provided it is not lower than your business’s unrelieved trading losses, can be surrendered for a payable R&D tax credit at 14.5%, which would be £33,350.

RDEC Scheme

This credit is calculated at 13% of the qualifying R&D expenditure for expenditure incurred from 1 April 2020 up until the 31 March 2023. From 1 April 2023 the rate has increase from 13% to 20%.  The benefit is given as a ‘below the line’ credit, which can be used to settle corporation tax or be claimed as a payable R&D tax credit if the company is loss-making. It is worth noting that RDEC is a taxable credit.

Pre-1 April 2023 at 13%:

With the UK corporation tax rate of 19%, the net credit would amount to 10.53% of the qualifying R&D expenditure in most cases.

Post-1 April 2023 at 20%:

With the RDEC rate increasing to 20% and the UK corporation tax rate changes coming into effect, your business could be entitled to a net credit that amounts to 15% of the qualifying R&D expenditure.