Surrendering Losses for R&D

If your company is in a tax loss position (as per the tax computation), you may be considering surrendering losses for R&D.

R&D tax credits are powerful tools for UK businesses engaged in innovation, especially loss-making ones. These credits help companies turn some of their investment in research into actual cash or tax relief.

However, with big changes introduced from April 2024, understanding when to surrender losses and when to carry them forward has become more complex.

This guide breaks down what surrendering losses for R&D means, how much you can surrender, the pros and cons of doing so, and updates on the new regulations.

What Does ‘Surrendering Losses for R&D’ Mean?

Research and development (R&D) expenses refer to money spent by businesses on innovation. This could include:

Improving their products
Offering new services
Enhancing technologies
Optimising processes

Surrendering losses for R&D means claiming tax relief, but choosing to use your qualifying R&D expenditure as a tax credit.

In other words, this is a cash payment to the business.

Companies may choose this option for many reasons, but it would only apply if they are in a tax loss position, as per the tax computation.

This option allows you to receive some cash out of the R&D Tax Credits, even though there’s no profit to offset.

How Much Can You Surrender for R&D?

A surrenderable loss arises when your qualifying R&D expense reduces your trading result to a loss.

That means you can only surrender up to the amount of your tax loss related to qualifying R&D expenditure for that period.

More specifically, the surrendered loss is usually the R&D tax loss you’ve generated after deducting any other reliefs or deductions.

This amount changes depending on your business and individual situation – for example, the amount of small and medium-sized businesses (SMEs) is limited to the loss arising from their R&D activity in that accounting period.

Having an expert accountancy firm to guide you, like Haggards Crowther, is essential. Your firm will offer financial advice to determine how much your business can surrender, and whether it’s the right move for right now.

What Are the New R&D Rules From April 1 2024?

Being clued up on the latest regulations for R&D tax relief is an important part of deciding whether it’s for you and your business.

New regulations have come into play for accounting periods on or after 1st April, 2024. Here’s a summary of what’s changed:

New ERIS Scheme (Enhanced R&D Support for Intensive SMEs)

From 1 April 2024, some SMEs can get extra help through the new ERIS scheme.

If your business qualifies, you can receive a cash payment worth up to 14.5% of your R&D-related losses – and this money is tax-free.

To qualify, your company must meet the “intensity condition.” This means that at least 30% of your total business spending must go towards R&D. This includes both:

R&D costs are shown in your profit & loss (Income Statement), and
R&D costs are recorded as intangible assets (like patents or software) that qualify for tax relief.

New Merged RDEC Scheme

Another change is that the old SME and RDEC schemes are now combined into a single “merged” R&D Expenditure Credit scheme for accounting periods starting on or after 1 April  2024.

If your company is making a loss, this means you can still claim a cash credit worth 20% of your eligible R&D costs (for spending from 1 April 2023 onwards).

The RDEC scheme is set up so that the benefit shows up in your main profit and loss account as ‘other income’, not just in your tax calculation.

Ideally, you should record it this way in your accounts. However, if your accounts are already finalised, you can include the RDEC benefit in your tax return instead.

RDEC Cap

Most companies have a limit on how much RDEC cash credit they can get. The cap is £20,000 plus 3 times the company’s PAYE and NIC bill for that year.

If your RDEC claim is over the cap, the extra amount gets carried forward to use in future years.

If your accounting year covers both before and after 1 April 2023, then the old and new rates apply based on when the spending happened.

Other Changes to Know

Subcontracted and Overseas R&D Rules Have Been Tightened – Only R&D physically carried out in the UK qualifies, and new rules define who can claim for subcontracted work.
Notification and Documentation requirements have increased. An Additional Information Form (AIF) is mandatory for claims from 8th August  2023 onward.
Qualifying Costs now clearly include R&D-related software, data, cloud costs, etc, as expanded since earlier updates.

Knowing When to Surrender Losses for an R&D Tax Credit

Loss-making companies must choose between:

Surrendering the Loss for an immediate cash credit, or
Carrying the Loss Forward to offset against future profits.

So, is a tax credit the appropriate decision for your company? Here are some important considerations:

Tax Group – Is another company in your tax group making profits chargeable to Corporation Tax?
Future Profits – Think about your projected profit – when should you move into profit (e.g. in the short, medium or long term plan)?
Past Profits – Do you have any profits in previous periods?
R&D Tax Credit Scheme – You also need to consider which scheme you are claiming under.
Corporation Tax (CT) Rate Charges – Consider your CT rate – as of April 2023, this has remained at 25% – but not all businesses will pay at this level. The company’s CT rate will be determined by their taxable profits – whether they are below £50,000 (making the tax rate 19%), while over £250,000 will incur 25%.
Current Cash Value – Consider how much more valuable that cash is to your business today, rather than at some point in the future. Is a tax credit imperative now, or could it be a premature move?

A trusted, expert accountant – like Haggards Crowther – can assess all of these considerations and more to determine whether a tax credit is the most appropriate move for your company.

Benefits of Surrendering Losses for R&D

Understanding the direct pros and cons of this process is also important to work out when to surrender losses and when to carry them forward.

Improving Cash Flow Now: This option allows you to access cash for the present, rather than saving tax later on. It essentially turns tax losses into cash and allows businesses to keep innovating.
Budget to Expand: With more cash in the pot, businesses can reinvest in their company. For example, the business could hire more staff, buy equipment, renovate, fund more R&D or support business growth.
Boosting Start-Ups: This cash payment from HMRC is especially useful for start-ups and early-stage companies that aren’t yet profitable.
Support Without Profit: Even if your business is making a loss, you’ll still be able to benefit, unlike other tax reliefs that only help when you’re already paying tax.
Encourages Innovation: This scheme rewards innovative businesses while reducing the financial risk of experimenting (e.g., developing new products, processes or software).
Investor Confidence: R&D tax credits are often viewed as a positive from an investor perspective, as they show clear financial planning and ambition for innovation.

Drawbacks of R&D Tax Credit

Naturally, there are some negatives to choosing this option for your business, which include:

Lower Future Tax Relief – Thinking about future finances, by surrendering your losses for a cash payment now, you won’t be able to use those same losses to reduce your Corporation Tax (CT) bills in future more profitable years.
Complex Rules and Conditions – Like all tax-related regulations, the R&D tax credit also comes with its complexities. The process can be quite detailed and requires careful calculation to meet all HMRC rules, especially the “intensity condition” and caps on the amount you can claim.
Cash Payment Delays – It can sometimes take up to several months to receive your R&D cash payment, which then, in turn, delays that expected cash boost.
Eligibility for Other Reliefs – Depending on your company’s situation, the business may then not be eligible for other tax reliefs or benefits, such as loss carry-back or group relief.

What’s the Next Step?

So, the decision: surrender now or carry forward?

Choosing between surrendering losses now for immediate cash or carrying them forward for future relief remains a key strategic call. Most companies will model both options, based on their growth trajectory, cash needs and profit forecasts.

We’d recommend the most important things to consider when maximising R&D tax credit value are timing and alignment. How does this fit with your long-term goals? What is your innovation cycle? Are your projected financials realistic?

While this guide offers an overview of surrendering losses to R&D, your business and situation would need to be accounted for to decide whether it’s the right call for you. That’s where professional, legal advice is crucial to ensuring you’re making the most appropriate decision for your business.

Here at Haggards Crowther, we offer specialist tax support and support for profit extraction & exit planning for businesses. Get in touch with a member of our expert team today.

Terry Smith

Terry started life at HM Revenue and Customs before moving to Ashdens and then on to BDO and Chantrey Vellacott, the combination of which has provided Terry with a wide breadth of experience which has proved invaluable when helping a broad range of clients with their tax affairs.

Whether it involves meticulously organising a client’s tax affairs or leveraging his expertise to mitigate their tax exposure, Terry has a passion for delivering tangible results.