On the surface, it may seem that R&D tax credits only offer companies a financial benefit. In reality, the benefits of R&D tax credits go much deeper and chief among these is cash flow.

One priority that all businesses share is to obtain profitability and cash flow management is the most surefire way to achieve this. Ensuring the money coming into a business is more than the money leaving it is not easy though. This has been especially true recently, with Covid-19 restrictions waxing and waning over the last year and a half. As such, many businesses have sought out less traditional income sources.

R&D tax credits are here to increase businesses’ cash flow by granting additional income.

The importance of obtaining good cash flow through R&D tax credits

As you know, cash flow concerns the movement of money both in and out of your client’s business. As long as your client is receiving more money than they are spending, then their business will be in profit.

While a profitable business is the end-goal for all companies, what we often see when it comes to R&D specifically, is that the profits are predominantly only seen in the long run. This can leave gaps in your client’s cash flow while the project is underway. However, if your client pursues an R&D credits claim they will be executing a cash flow strategy that is hugely beneficial. This is because the financial benefit offered by R&D tax credits can plug the gaps in the short term. Furthermore, R&D work often results in greater efficiency with regards to production processes. This enables positive cash flow in the future by reducing the outgoings of your client’s business.

At the end of the day, cash is what keeps businesses alive. While cash flow is important for all businesses, below are some examples of businesses that are particularly affected by it.

• Startups: Cash flow is most important for startups as the early stages of a business come with a lot of spending. What’s more, is that this financial strain is often due to investments that only yield returns in the long run. As a result, startups aren’t always able to rely on their products, services and customers alone to balance their books. To achieve a positive cash flow, startups must often seek out alternate ways of generating revenue. 
• Seasonal businesses: These businesses’ inflow is not consistent because it relies on products and/or services that are in demand during only small parts of the year. The huge lulls in income seasonal businesses experience often make cash flow an issue. Sources of income not related to the businesses’ main product help these businesses top up their finances. 
• Cash businesses: Businesses such as retailers and restaurants often experience input and output as physical cash. Unless this is well recorded through invoices or other forms of paperwork, it is hard to ascertain the state of the company’s cash flow. Even so, assessing the state of the business’s cash flow can be complicated and time-consuming.

The cash flow benefits of R&D tax credits

Difficulties with cash flow arise mostly as a result of a lack of income sources. R&D tax credits help businesses achieve a positive cash flow in two ways.

1. R&D tax credits as a new source of income

Once you establish the processes and work that qualifies as R&D within your client’s business, they’ll be able to claim year-on-year. R&D tax credits provide either a reduction in corporation tax or a tax credit. Both of these are a significant form of income for businesses of all sizes and sectors.   

Also, R&D tax credits have few barriers to entry beyond the claim application. For example, if your client has received other grants it will not prevent them from claiming R&D tax credits. The only requirement is that the grant did not fund any of the R&D work.

However, your client must be aware of HMRC’s definitions of R&D before they make their claim. Read about the work that qualifies as R&D here.

2. They are visible within your client’s accounts

For SMEs, R&D tax credits are below the line, meaning they are a benefit shown in your client’s income statement. This means they are easily traceable when it comes to calculating cash flow. For companies claiming through the RDEC scheme though, the benefit is visible above the line. This means it is taxable and reflects positively on your client’s gross profit.

Additional info of note

As R&D tax credits are only claimable on projects within your client’s last two accounting periods, they could be waiting months to receive the financial benefit. This is worth taking into account if they require the funds within a short time frame. As their accountant, it may therefore be worth discussing shortening an accounting period. Although this will have other implications for the business, the cash flow benefit may take precedent.

The cash flow benefit offered by R&D tax credits can be secured with the help of advance assurance. This allows companies who are claiming R&D tax credits for the first time to guarantee their claim is successful. However, obtaining advance assurance requires another application that is separate from the claim itself.

How loss-making SMEs can benefit

It might seem counterintuitive for a loss-making company to be undertaking R&D but it can yield great cash flow benefits through R&D tax credits. Loss-making companies are able to surrender their losses in exchange for a cash credit. This credit is worth 14.5% of the total losses surrendered. Unlike traditional R&D tax credit claims, this cash credit is available as soon as the claim is processed. As a result, loss-making SMEs can correct their cash flow at short notice.

Get your client on the right track with made.simplr

With the help of made.simplr’s online R&D tax credit portal software, you can get an accurate prediction of how much your client could be benefiting. Xero integration, seamless transitioning and automation elements mean your client’s claim is in good hands. They will also be able to clearly visualise their cash flow to boot.

Book a demo today!