You’ve submitted your R&D Tax Relief claim to HMRC and you know how much ‘credit’ you’re due to receive. Now you’re thinking, “what’s next? How should you re-invest your R&D Tax Credits?”
As tax advisors, we cannot tell you how to use your R&D Tax Relief; however, we know there are various options available to most businesses. We also know that how your business utilises the benefit will depend on how much you receive and how it’s paid back to you from HMRC.
HMRC’s R&D Tax Relief schemes pays up to 33p for every £1 spent on eligible R&D activities – the exact amount paid per £1 will alter on whether your business is profit, breakeven or loss-making.
Profit Making Businesses
A profitable business can offset some or all of its profits, thus reducing its Corporation Tax when its due at a rate of 25p to every £1 spent on R&D.
If a business is around the breakeven point then the business can cash in the resulting adjusted loss, which is worth 18p to every £1 spent. Though the business can choose to save this loss and carry forward, in which case this can be used to offset future profits of the same trade at the better rate of 25p to every £1. As with any losses, these can be carried forward to future years or back to the 2 previous years where profitable.
Loss Making Businesses
If the business is heavily loss-making then the claim could be maximised at 33p in the £1 spent. One misconception we come across is that because a business has never paid Corporation Tax, they can’t get money back from HMRC – Wrong! You can cash in losses if you could be liable for Corporation Tax but have never paid CT. If your accounts are ready then you can submit to HMRC the month after your year-end and get paid early, which is a great cash boost for early-stage R&D companies.
A word of warning though, as a breakeven company carrying forward losses you can only attain that benefit if the business makes a profit. If your R&D claim keeps wiping out your profit, then you may never be in a position to gain that benefit. It’s sometimes better to cash it in now, rather than never get the benefit.
Most, if not all, businesses will have areas for reinvestment that spring to mind straight away; so, before jumping feet first into spending your R&D Tax Credit – consider where your biggest pain points are and which areas of the business could really benefit from that extra injection of cash.
You’re likely to already have plans for your business in the coming years – what you want to achieve, how you want to expand, new products, processes or services you want to introduce and how you plan to get there. Could you use your R&D Tax Credits to accelerate those plans and bring them to fruition earlier than you expected?
Do you invest in purchasing new equipment that could further benefit your business? This could be as simple as upgrading your computer and phone systems to increase efficiency or as complex as a brand-new production line or piece of machinery that you need to increase your business’ capabilities.
You could invest in the recruitment and hiring of new staff members – adding a team member to grow your business’ technical expertise, bringing previously out-sourced technical work in-house or getting that extra pair of hands, that you’ve been needing for a while.
Expanding your facilities could be the area where you invest your tax rebate – moving to a larger space, renting additional R&D facilities such as laboratory space, or opening a new office in a different region to extend your business’ reach.
If your R&D activities have resulted in a viable ‘product’ that you want to begin to sell, you could use your R&D Tax benefit to launch your latest product – invest in the production, marketing & sale of your product and begin to generate some return on investment.
Fund more R&D
Whether your R&D activities were successful or not, you could use the credit you receive from HMRC to fund even more innovation by reinvesting in more R&D activity. By continuing the cycle, you could guarantee another year of development and another R&D Tax Credit claim!