What is a surrenderable loss for R&D tax credits?

A surrenderable loss allows loss-making companies to claim an immediate cash payment for their R&D tax credit. The alternative is to carry the credit over to a future year to claim once profitable. The carried-over credit returns up to 20%, whereas when the cash credit when the loss is surrendered is only 14.5%.

In principle then it might make sense for companies to carry over the loss and claim the higher rate. However, the reality is that most companies choose to take the cash in their current accounting period.

More often than not, businesses surrender the loss and take the cash credit at a lower rate in the short-term. As cash flow is such a pressing concern for most businesses, especially at the earliest stages of growth, this is unsurprising.

This effect is also compounded by the fact that the 20% rate of credit is only claimable against future profits. As many businesses are unsure about when they will hit profitability, this also affects their decision.

What’s more, if your loss-making business has a high growth rate then you might achieve a higher return by taking the cash in the short-term. When accounting for company growth, the cash credit might generate more value next year than the carried over credit. If for example, your company has an annual growth rate of 100%, then 14.5% cash returned this year would effectively generate 29% of value next year. That obviously compares favourably with the 20% available from a carried over credit. In the case of most high-growth businesses, therefore, surrendering the loss generates more value than carrying forward the credit.

Since April 2014 HMRC increased the cash credit after surrendering the loss to 14.5% from 11%. HMRC did this to ensure that loss-making early-stage businesses can effectively fund their innovations. For a full background on the changes to the surrenderable loss rate consult HMRC’s intangibles R&D manual.

We’ve written more broadly about claiming as a loss-making business. Or, if you want a more general introduction to R&D tax credits then consult our introduction to R&D tax credits. If you’re weighing up whether to take a cash credit or carry forward the amount, then get in touch with one of our advisors and they will be able to advise you further.