R&D Tax Credits for Startups

If you are an entrepreneur and want to turn your innovative idea into reality, then R&D tax credits could give you a financial helping hand. Whether it is a bespoke piece of software, energy saving device or dairy-free cakes, your new product or service could make you an ideal candidate for R&D tax relief.
R&D Tax Credits for startups

Approved Accounting - R&D Tax Credits for Startups

If you are an entrepreneur and want to turn your innovative idea into reality, then R&D tax credits could give you a financial helping hand. Whether it is a bespoke piece of software, energy saving device or dairy-free cakes, your new product or service could make you an ideal candidate for R&D tax relief.

R&D tax relief isn’t just for big corps, techies and scientists. Most startup companies are constantly challenging the status quo by developing something new, unique or different. Even if your product or service is an adaptation of what is currently available, then you may qualify for cash back through R&D tax credits.

At Approved Accounting, we find that there is a lot of misunderstanding as to who qualifies for the R&D tax relief scheme. HMRC rightly rewards any company, including startups, for their research and development efforts, and we are dedicated to helping them get the tax credits they deserve.

If you’re not sure where to start when it comes to claiming costs you are owed, then contact Approved Accounting today. We can help you navigate the sometimes complicated scheme and ensure you maximise your claim.

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Who qualifies for R&D tax credits?

R&D tax credit for startups are a type of tax relief designed to encourage greater research and development spending, which in turn leads to greater investment in innovation.

R&D tax relief is comprised of two schemes, one aimed at startup companies and SMEs (Small to Medium-Sized Enterprises) and one aimed at larger companies. Here at Approved Accounting, we specialise in R&D claims for startups and SMEs, although we are well-versed in both schemes.

Innovative new businesses that undertake any kind of R&D project are eligible to make a claim. It can be awarded as a payable tax credit of up to 14.5% of the claim, or as a tax relief, however, the project, must meet strict criteria set by HMRC.

To qualify, your company must:

  • Be structured as a limited company, paying corporation tax.
  • Have fewer than 500 staff, although there’s no stipulation in the rules that says you must have employees.
  • Have a turnover of under £86m.
  • Should not be receiving state aid towards the project for which you are claiming.

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What projects qualify as R&D?

It’s not just project launches or big breakthroughs that qualify and are rewarded. Many of our clients are pleasantly surprised to learn that most of their research and development efforts are eligible, even those they consider ‘everyday’ or products that are modifications of those that already exist on the market.

As with all tax reliefs, there are a lot of terms and conditions to wade through, but at Approved Accounting we know the legislation inside out.

As a brief introduction, here is HMRC’s four-point eligibility checklist:

1. Your R&D project identified a technological advance in science or technology

  • You should, of course, be 100% certain that the solution isn’t already out there.
  • The advancement should be for the benefit of your sector as a whole.
  • The advancement may be in relation to a new product/process/service, or an improvement to an existing product/process/service.
  • The advancement must be technological or scientific in nature and not merely cosmetic.

2. Your R&D project had to overcome technological uncertainty

  • In order to come up with a solution, there must have been technological uncertainty to start with. To put it another way, the technological knowledge required to fulfil your aim simply didn’t exist before. You will be required to prove that the uncertainty existed.

3. You attempted to overcome the uncertainty as part of your project

  • You will be required to detail your methodology, including experimentation and testing.
  • You must show that the intelligence to overcome the uncertainty could only have come from within the course of your research, and not from existing knowledge or capability.

4. The solution could not be reached by another competent expert

  • You will need to prove why the solution could only be solved by your team of experts within the course of your project. If your advancement could have been easily worked out by another professional in your field, it will not qualify.

How to maximise your R&D tax credits for startups

If your business is a startup or in its infancy, claiming R&D tax credits can be immensely beneficial. The significant financial gains of receiving R&D tax credit is often invaluable for innovation and development.

During the early stages, small businesses are often too busy to even consider claiming. However, if you are a startup, SME or a young business, claiming R&D tax credits before your first tax return will yield great results and can help to free up technological assets.

For most startups, a lot of the research and development is done before trading even began, as this is normally required in order to develop the new products, goods or services that you’ll be delivering.

This is why it is so important that startups or newly formed companies take into account any pre-trading R&D expenditure, and keep an accurate record of all the costs, as these are considered an enhanced trading loss when you file your first claim.

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How does R&D tax relief work for startups?

Your company needn’t be profit-making in order to make a claim – which is good news for many startup companies, as on average it takes around two to three years to turn a profit.

This is why HMRC’s R&D tax credit scheme offers such a great opportunity for early stage businesses to carry forward losses or to convert them into some much needed money back.

R&D tax credit can be claimed in one of two ways, depending on whether your startup or SME is profitable. Here we explain more!

How do you work out an R&D tax credit claim?

Once you have worked out your eligible R&D expenditure, the figure is multiplied by the current rate of 130%. On your company tax return, this sum is added to the normal 100% of costs deducted from your annual profit.

1. Enhanced expenses relief - for profit-making companies

Under the R&D tax credit scheme, your business can claim an extra 130% of eligible expenses from your yearly profit before it is taxed, at the current rate of 19%. That’s in addition to the normal 100%, making a 230% deduction in total.

2. R&D tax credit - for loss-making companies

If your company is making a loss then the allowable loss can be surrendered for a tax credit at the rate of 14.5%, or, the loss can be carried forward and offset against future profits your company may make.

How does claiming R&D tax credit work?

Once you are certain that your project qualifies for an R&D tax credit, there are several stages to work through in order to make your claim.

What is the qualifying period of an R&D project?

The first stage is to determine the qualifying period of the R&D project. HMRC places a time limit of two years on R&D tax credit claims due to them being a form of corporation tax relief. Typically, the deadline for amending a corporation tax return is 24 months after the end of the relevant accounting period.

HMRC defines the start of the project as the point you began to solve the technological uncertainty, and the end of the project as when the uncertainty was solved or abandoned. It does not include the production or distribution phase.

As the first year of business for startups tends to be less structured, it is important that you understand when to claim and what you can and can’t claim for.

At Approved Accounting we can help you distinguish any qualifying periods and activities that will form part of your R&D tax relief claim.

How R&D tax credits can help startups optimise expenses

When compiling your R&D tax credit claim, you will need to work out which costs relating to your project are eligible. Acceptable expenditure falls into the following categories:

  • Employee salaries, NI and pension contributions – this includes support staff as well as technical staff, as long as the work they undertake is directly for the project.
  • External agency and subcontractor costs – you can claim 65% of the cost of hiring external staff to work on your project.
  • Materials – this includes physical materials, consumables, utilities and software licences, as long as the project takes up a reasonable share of its usage.

There are certain costs that are exempt, namely:

  • Production and distribution
  • Capital expenditure
  • The cost of land
  • The cost of patents and trademarks
  • Rent or rates

How do you work out an R&D tax credit claim?

Once you have worked out your eligible R&D expenditure, the figure is multiplied by the current rate of 130%. On your company tax return, this sum is added to the normal 100% of costs deducted from your annual profit.

When can I make an R&D tax credit claim?

R&D tax credits can be claimed up to 24 months after the end of the accounting period in which the R&D spend was incurred. To make a claim, you will need to include it in your annual company tax return.

What are R&D tax credits worth to you?

The most successful entrepreneurs are those that take advantage of every available opportunity afforded to them. One such opportunity that gives small businesses and startups a competitive advantage is the R&D tax credits program. So make sure you don’t miss out on money that you have already earned by claiming your tax relief.

Approved Accounting - R&D Tax Credit Experts

Our team at Approved Accounting are passionate when it comes to getting our startup clients the money they deserve. We understand how time-consuming and confusing tax can be and that’s where we can help relieve the burden, assisting you to process your claim and achieve the maximum return.

We know that R&D tax credits can be a financial lifeline for many startups, and we are here to help you boost your claim while saving you valuable time and hassle.

So even if the process sounds too complicated, your business has yet to produce any revenue or you have yet to employ any staff, our knowledgeable tax experts are ready and waiting to answer your questions about startup R&D tax credits.

Contact us at any time, we look forward to hearing from you.

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