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At a loss – Why accountancy clients shouldn’t write off a loss-making innovation

Author: Tom Mason

We all know that investing in R&D can be a costly enterprise, particularly for SMEs who typically lack the cash reserves, credit, and power to attract investment that can support the initial period of a new innovation.

However, we also know that these businesses are precisely where support for R&D is needed most, to diversify R&D space in the UK and encourage innovation at all levels.

This becomes more difficult when these projects are loss-making.

SMEs often struggle to justify a loss-making innovation when funding is limited, but they can be vital to the wider R&D space.

Let’s look at how to approach loss-making projects with clients to make sure that their innovations get the support they need to succeed.

Redefining loss-making R&D

Outside of an R&D context, how do your clients normally approach loss-making projects?

It makes perfect sense from a business perspective to offload or abandon projects, which will clearly make a net loss and cost the client money it can ill-afford to lose.

However, your approach to loss-makers in the R&D space needs to be different.

Loss-making needs to be reframed, not as something that will negatively impact the business, but as a secondary concern.

It is very important that you communicate the value of a loss-making R&D project, if it genuinely addresses an uncertainty or challenge within qualifying sectors, beyond the cost.

The Government is still keen to encourage legitimate R&D claims to build a culture of innovation across all science and technology sectors – regardless of initial ability to make a profit.

That is why part of the R&D tax credit system is specifically geared towards this to provide an immediate cash benefit to loss-making projects.

Enhanced support

As you know, the R&D tax relief scheme aims to support innovation and relieve the burden of associated costs, meaning even loss-making SMEs can apply for the relief.

With a net benefit of 16.2 per cent of qualifying expenditure, R&D tax relief exists to incentivise innovations and invest in the long-term success of R&D, rather than focusing solely on what a new product or process can achieve today.

This is the message that needs to be getting across to your clients.

Additionally, under the new scheme, which has come into force for accounting periods beginning on or after 1 April 2024, R&D intensive SMEs which make a loss can access enhanced support.

If a client allocates 30 per cent or more of total expenditure to R&D and are loss-making, this may represent a substantial challenge to its cash flow – but intensive relief can deliver a net benefit of 27 per cent.

Loss-making R&D clients need to be aware that R&D relief can significantly relieve the financial pressure of investing in new innovations – it is not only something that can be claimed, but something that should be claimed.

Offering encouragement

There may be an assumption for clients with loss-making projects that they cannot claim for R&D tax credits or they may not even begin a project where there is some doubt.

They may not even approach you to discuss it, or it may arise in conversation as an option they have considered and discarded.

However, this is where we can offer support to you and help you to advise clients on their full range of options for claiming tax relief on loss-making R&D projects.

It is most important to approach loss-making not as a failed venture or as a result of inefficiencies, but as a by-product of innovation which can be alleviated by R&D tax reliefs.

In this way, you help your clients make the most of the reliefs which are available to them and support the founding principles of the scheme, to encourage innovation while lowering the burden of costs.

To better support your loss-making clients with R&D tax relief, contact the randd uk team today for advice and practical guidance.