12 Jun 2024

Does an R&D claim always benefit cash flow?

Samuel Hutchinson
R&D Tax Consultant

Research and Development (R&D) claims are a valuable incentive offered by governments around the world to support companies that work on innovative projects in science and technology. R&D tax claims allow companies to recover a portion of the expenditure incurred on R&D activities in the form of tax liability reductions or in some instances, payable cash credits. While R&D claims are undoubtedly beneficial for fostering innovation and reducing the financial burden on R&D projects, it’s essential to understand that they may not always result in immediate cash flow benefits for every organisation. In this article, we’ll explore the nuances of R&D claims, exploring how they may or may not directly impact cash flow.

Understanding R&D Claims

R&D claims are designed to mitigate some of the financial risks associated with innovating or in some cases, financially reward companies for their innovation efforts. These claims typically allow companies to reduce their tax liabilities or receive cash refunds, depending on the companies’ final tax position.

When R&D Claims Benefit Cash Flow

R&D tax credits are based on identified R&D spend that is then enhanced by the R&D tax scheme rates. This results in an ‘enhanced R&D expenditure figure’ which is deducted from the company’s taxable profits or added to its losses.

  1. A corporation tax reduction
    If a company is profit-making, the R&D claim will reduce the company’s tax liability. This indirectly benefits a company’s cash flow by reducing its overall tax burden. With a lower amount of income subject to taxation, the company retains more cash which can be used for various operational needs such as taking on new staff, investing in new technology, or even exploring new markets.
  2. Cash Credits
    If a company is loss-making, the R&D claims will generate a payable cash credit (i.e., money refunded). The cash payment received will have an immediate impact on the company’s cash flow and is especially useful for start-ups and early-stage companies that may not yet be profitable but are heavily investing in innovation.
  3. Investment in Future Growth
    At TBAT, we can see that it’s the companies who claim year after year for their R&D activities, that can go on to progressively invest more and more into the development of new products and processes. This increased spending, in turn, generates innovations that end up driving future revenue and profitability, contributing to long-term cash flow. By fostering a culture of continuous improvement and innovation, companies (and TBAT Innovation clients) can stay ahead of the competition and create sustainable and maintainable growth trajectories.

r&d claims research and development innovation

3 Important Cash Flow Considerations

  1. Timing:
    Companies looking to claim R&D tax credits will need to factor in the payment interval between filing the R&D tax claim and receiving the tax benefit. This delay will need to be factored into cash flow forecasts to ensure companies have sufficient liquidity to cover this interim period.
  2. Eligibility Criteria:
    Not all R&D projects may qualify as the definition of R&D for tax purposes differs from the conventional definition of R&D. It is the definition of R&D for tax purposes which forms the eligibility criteria. If your R&D projects do not meet the criteria you will not be able to claim the benefits. If you’d like to read more about project eligibility then please read our blog here
  3. Project Costs:
    Remember, the R&D tax scheme enables you to reclaim a portion of the incurred R&D expenses, not all of it. If the R&D costs for a project are substantial, the benefit received will not fully offset the expenditures, potentially impacting cash flow. Companies will need to evaluate the cost-benefit ratio and consider whether the remaining out-of-pocket expenses are manageable.

Conclusion

In summary, R&D tax claims can significantly enhance a company’s cash flow by providing money to a company either directly or indirectly via payable cash credits or reduction in corporation tax liabilities. Regardless of how the benefit is received, the result is a greater R&D investment opportunity.

Hopefully this blog has provided some insight into the relationship between R&D tax credits and cash flow. By understanding both the benefits and challenges of claiming R&D tax credits, companies can make informed decisions about leveraging R&D claims to support their financial health and innovation strategies.

r&d claims Cash flow r&d statement

How can we help?

TBAT Innovation offers comprehensive support for R&D tax claims, providing expert guidance and personalised consultation to help businesses navigate eligibility criteria and maximise benefits. Our services include in-depth eligibility assessments, meticulous preparation of technical narratives and documentation to support the R&D claim, and management of the entire submission process, including follow-up with HMRC. With a strategic approach to identifying all qualifying activities and costs, we ensure you receive the highest possible benefit while remaining fully compliant. We also offer ongoing support to keep you informed about legislative updates, ensuring continuous compliance and optimisation of your R&D tax incentives.

Contact TBAT Innovation today to arrange a free 1-2-1 consultation.

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