R&D tax claims have, by almost every measure, become more complicated over the last few years. More rules, more admin, more scrutiny.
But hidden inside the shift to the merged scheme and ERIS is a quiet, under-discussed change that genuinely makes life easier for one specific group of companies.
That group: the historically loss-making SME that has worked hard, turned a corner, and is now in profit, but still carrying large tax losses from its earlier years.
For that company, under the old SME scheme, doing an R&D claim could result in no current cash benefit. Not because the claim was wrong or weak but simply because of the mechanics of how the scheme worked.
That situation no longer exists. And it is worth explaining why.
What was the “Preserved Losses” situation?
Companies that make losses are allowed to carry these taxable losses forward to offset future corporation tax. This ensures that the company doesn’t need to pay Corporation Tax until it has made an overall total profit.
So, imagine a scenario where a company starts trading in early 2019. After three years of trading that company has amassed £100,000 of taxable losses developing its product. By 2022 the company is profitable and has a bumper year and makes £100,000 of taxable profit in the year. It’s simple, the profit is offset by the taxable losses. The company will pay no Corporation Tax, but the losses will be fully used up and gone.
Next year if the company makes a profit, all the profits will be subject to corporation tax.
However, the company also had qualifying R&D activities in the year. As an SME, it was claiming under the old SME scheme, where the benefit is based around receiving an enhanced R&D deduction in your tax return. Lets assume the company identifies R&D expenditure that generates an R&D enhanced deduction of £100,000.
Importantly the R&D enhancement gets applied to reduce taxable profits before the brought-forward losses were used. Let’s look at an example:
| Taxable profit before R&D | £100,000 |
| R&D enhanced deduction | (£100,000) |
| Taxable profit after R&D | £0 |
| Brought-forward losses used | £0 |
| Losses carried forward | £100,000 |
| Corporation tax payable | £0 |
| Cash received from HMRC | £0 |
The company pays no tax, the same as if it hadn’t done an R&D claim at all. It also, will not receive a payable credit, so there will be no immediate cash benefit to the R&D claim at all. So, what was the point?
The claim did mean, however, that the company has not used its brought-forward losses. These have been preserved at £100,000 and carried forward to use in the future.
Hence the term “preserved losses.” The R&D claim has protected those losses rather than them being used up. The benefit is real, but it is entirely a future benefit.
The final important point to note is that this was specific to the old SME scheme for profitable SMEs bringing forward tax losses. Here is why:
- Under the old large company RDEC scheme, the R&D credit was calculated separately and applied against tax as a credit. It did not interact with brought-forward losses in the same way, and you would receive the immediate cash benefit regardless.
- For loss-making SMEs, there was no issue either: the R&D simply increased the loss, which could be surrendered for a cash repayment credit. Cash came in through the door.
The preserved losses trap was a very specific combination: You needed an SME, a profitable year and brought-forward losses. This might sound niche but it was more common than you might think, particularly among startups and companies that went through difficult trading periods in early years.
Why This Made the R&D Decision Genuinely Hard
The future benefit of ‘preserved losses’ is a legitimate one. In the above example, the company now has £100,000 of losses to carry forward, meaning it can save between £19,000 and £25,000 of future corporation tax (depending on the applicable rate) when profitable.
But the consideration that companies had making the decision on whether to make an R&D claim is this: When will it see that benefit?
- If next year is a loss-making, it won’t see it.
- If next year is break-even, it won’t see it.
- If the company continues to spend an amount on it R&D that’s similar to its profit. It still won’t see it.
This could mean that future benefit keeps rolling forward, indefinitely.
Illustrative scenario: A startup that spent its early years burning through cash and accumulating £500,000 of tax losses. It eventually turns profitable. Under the old SME scheme, with a large enough R&D spend, the company could theoretically be doing R&D claims for years and never seeing a penny in cash from them, every benefit simply layering up as ever-more-distant future tax savings.
Meanwhile, in most cases, the company will still have to pay an advisor for the R&D claim preparation. If the advisor charged a contingency rate of around 20%, a future £25,000 Corporation Tax benefit could cost £5,000 in advisor fees to access a benefit that potentially may not materialise for years.
This created a genuinely difficult conversation between advisor and client. Good proactive advisors would be flagging this early: if you have large brought-forward losses and you are in profit this year, a conversation should be had before work on the claim starts.
Some R&D claimant companies only found out at the end of the process that there was no cash coming.
Such a scenario made it a tough decision for some companies – is it worth doing an R&D claim? You had to weigh up the time investment and the advisor fee cost for a benefit you might not receive for a long period of time. And that was not the purpose of the scheme, especially those SME Scale-ups that the scheme was designed to incentivise to carry out R&D activities.
The New World: Merged Scheme and ERIS
In the new world for periods starting on or after 1 April 2024 there are only two schemes these companies can fit into. Either:
The Merged Scheme
The merged scheme is based on the old large company RDEC model. Which is an above-the-line expenditure credit.
As mentioned earlier in the article, the mechanics of the calculations are different. Any brought-forward losses are used before the R&D credit is applied. The company uses its losses to reduce its tax liability, and then the credit sits on top. So, the comparable preserved losses situation cannot arise.
ERIS (Enhanced R&D Intensive Support)
The ERIS scheme is available to loss-making, R&D-intensive SMEs only. So importantly to qualify for ERIS, the company must be loss-making pre any R&D adjustments.
A company that is loss-making pre-R&D cannot be in the preserved losses scenario. As it has no taxable profit, there are no brought-forward losses being consumed.
The R&D enhancement in this case increases the loss, which is then surrendered for the cash credit.
What This Means in Practice
For historically loss-making SMEs that have now become profitable, the previous question of “is it worth doing an R&D claim for a benefit I might not see for years?” has gone.
Under the merged scheme, these companies can now access the same immediate cash benefit as any other claimant. The decision to claim is no longer complicated by timing uncertainty.
In a landscape where R&D claims have undeniably got more complex, it is good to highlight this is one area where the reform has quietly made things fairer and simpler for a specific group of important R&D claimants.