R&D tax losses revisited
If you have made an R&D claim during the Covid pandemic which has involved claiming a tax credit AND carrying back losses, it may be worth revisiting the claim to see whether you can get further FREE cash back for your clients!
The most recent budget back in March was, unsurprisingly, aimed at reigniting the economy following the effects of the Covid pandemic. One notable announcement was that of a temporary window giving greater flexibility of trading losses, in that they can be carried back up to three years (as opposed to one year) for losses up to a maximum cumulative total of £2 million.
Interestingly, this applies to accounting periods ending between 1 April 2020 and 31 March 2022 – so the window applies retrospectively as well as going forward. This gives rise to a situation where R&D claimants who have made a claim for year ends from April 2020 can potentially enhance the value of their claim.
In the vast majority of cases where a company has been historically profitable but then made a loss, the most tax efficient use of losses was to carry these back to offset against prior year profits. This saves tax at a rate of 19%, comparing favourably to claiming an R&D tax credit at a rate of 14.5%. The new legislation allows claimants to carry losses back a further two periods, meaning that more tax can be repaid at 19% instead of 14.5%.
Let’s say, for example, a company has claimed a tax credit of £14,500 (on £100,000 of losses) for the year ended 31 December 2020. It is worth looking back to the 2017 and 2018 periods and seeing whether there is £100,000 worth of profits that can be offset instead, which would result in the company being able to claim an additional £4,500. This is perfectly legitimate as long as the claim is made within one year of the filing date – in this example, by the end of next year (2022). This does not affect the validity of the R&D tax relief claim either as the exercise simply constitutes a change in the treatment of trading losses.
Our Message To Our Referral Partners
If you have any clients who have claimed a tax credit in years ending since April 2020 and have also carried back losses, it is worth reviewing tax returns from the previous two periods to see whether an amended loss carry back claim can be made. After all, it is free money that your clients are now entitled to.
For any assistance with this, the YesTax team would be delighted to help! Contact hello@yes.tax or your main YesTax point if you have any questions regarding this article.
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