“Surrendering the loss” allows loss-making companies to claim a cash payment for their R&D tax credit, rather than carrying the credit over to a future year to claim against expected profits. The rate of return for a carried over credit is up to 20%, whereas when surrendering the loss, the cash credit 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.
For many early-stage businesses, it makes sense to prioritise immediate cash-flow over a future return. Especially since the carried over amount can only be claimed once the company becomes profitable, which can be hard to predict.
However, for many tech companies the high growth rate of their business means that not only is there a cashflow reason to take the credit now, but also the return when accounted for company growth could be higher this year rather than next. If for example, a company has an annual growth rate of 100%, then 14.5% cash returned this year would effectively generate 29% of value next year. In that case the R&D tax credit often makes more sense to “surrender” for cash in the current year.
We’ve written about claiming as a loss-making business. 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.