Research and Development tax credits, typically referred to as R&D tax credits, should be a key consideration for innovative startup companies in the UK.
They offer the opportunity to take advantage of financial rewards, whether through reducing your Corporation Tax liability or through a cash injection that can help your business thrive, particularly in its infancy.
Many companies, however, still aren’t aware that they can make an R&D tax credit claim or don’t realise the benefits this tax incentive can provide. Others might be worried that they’re not eligible or that they think the process will be complicated. Here are a few reasons why R&D tax credits are well worth investigating.
What is R&D defined as?
R&D is defined as:
- creative work which contains novel elements or outcomes that differ from your routine work
- work undertaken on a systematic basis, such as one-off or ‘lucky’ discoveries
- work that boosts the stock of knowledge, not just within your company but results in an industry advancement.
The guidelines state that this work shouldn’t just duplicate what’s already out there, but should result in significant new progress and innovation. So, for many startups, these guidelines do apply and could well result in significant tax relief claims.
It’s suitable for a range of industries
One of the main reasons so many businesses don’t claim R&D tax credits is that they’re unaware that their industry is eligible. Although companies may think it’s only science and technology industries that are applicable, the reality is that any startup, in any sector or industry, can apply. Providing you’re based in the UK and registered to pay Corporation Tax, you can benefit from R&D tax credits.
There are certain criteria that the government requires of businesses before being accepted, but industry isn’t one of them.
Failure doesn’t mean you’re not eligible
Even
if the project failed, you can still claim R&D tax credits, providing a technical or scientific investment was made. This is great news if you’ve innovated and found that the project failed in its objectives, as you can still be financially better off. This can be of great comfort to businesses just starting out that may still be in the experimental stages of their company. In fact, it gives businesses the opportunity to celebrate their failures just as much as their successes, since it gives you the chance to learn what did and didn’t go well so you can plan better when developing future projects.
A variety of costs can be accepted
A core element of applying for these tax credits is understanding what you can claim for and how you need to calculate for these costs. Broadly speaking, there are eight categories of qualifying costs associated with R&D tax credits. These are:
Direct staffing expenses, including staff wages and employers’ NICs
R&D consumables which have been used in the project
Software
Contributions to independent research
External workers
Subcontracted R&D tasks
Prototypes
Volunteers for clinical trials
However, the
HMRC has certain exemptions that you should be aware of when completing your claim to ensure that your application is right the first time.
There’s no minimum claim requirement
In previous years, businesses needed to have spent a minimum of £10,000 on R&D projects and activities in order to claim tax credits. This meant that smaller businesses weren’t able to claim, as they were exempt based purely on their available budget for R&D activities. However, that’s since changed, although many companies aren’t aware of the new rulings which could mean they’re eligible without realising it. The old rules don’t apply anymore and businesses of all sizes can make a claim even for the smallest amounts, which is good news for startup companies who may not have the budget for high-cost R&D projects.
You don’t need to have turned a profit
Many businesses neglect to make a claim because they haven’t turned a profit and think that this makes them exempt from the opportunity; yet, this isn’t the case. Your business can still be eligible for tax relief even if you’ve made a loss, providing the HMRC approves the application. The way in which the business receives the tax relief varies, however, depending on the regime it’s used. A loss-making SME is eligible to receive between 14.5% and 33% of qualifying R&D expenses, while a larger loss-making company can benefit from relief of up to 9.7% of eligible R&D costs. There’s also the option for SMEs who’ve made a loss to not surrender the loss, but carry it forward against profits instead.
In summary, making a claim for R&D tax credits isn’t always straightforward, but it is a process that’s available to more companies than many people realise. Every £1 spent on R&D is deductible at a rate of 225% for small businesses, serving as a huge tax relief for investments into innovation. It’s well worth investigating the criteria required to make a claim, therefore, as your small business or startup might be eligible for tax relief which is always a benefit to companies of any size, but particularly those who are in those early stages of development.
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