By Emma Lewis, Tax Cloud
Start-ups grow at a rate of knots – it’s the only way they can survive. And with the UK on the brink of recession, new businesses must grab any funding with both hands.
LinkedIn founder Reid Hoffman said that companies can scale either by creating demand for their product (marketing) or by improving their products so to generating demand organically (investing). This is something start-ups – and any good entrepreneur – will know well.
The key to any kind of business growth lies in research and development (R&D). This is because without R&D new and innovative products, processes and services can’t be brought to life.
No matter what sector or industry a business operates in, R&D aids in streamlining processes, strengthening supply chains, cutting costs and eliminating waste from production. Successful R&D projects also bring valuable experience for your team, developing a competitive advantage that helps the business thrive in a globally interconnected economy.
Innovation benefits the wider community too, not just the business individually. Customers, employees and government institutions benefit from new innovations and concepts. Plus of course a company on the grow is a company that is supporting the economy through job creation. This is why the UK government has long provided a very lucrative financial incentive for companies to innovate: R&D Tax Credits.
What are R&D Tax Credits?
The R&D Tax Credits scheme was launched back in the year 2000 to support UK companies with the costs of innovative R&D activities. This has since put Britain on the map, resulting in more patent applications being filed and more intellectual property than ever before.
This generous tax relief essentially allows companies to claim back up to 33% of their eligible R&D expenditure from HMRC. The relief is administered either as a reduction in a company’s Corporation Tax bill or as a cash lump sum if the company made a loss.
The range of eligible R&D projects and costs is purposefully very broad. The size, make-up and industry of the company doesn’t matter either, as long as the criteria for claiming R&D Tax Credits is met.
It’s surprising how R&D tax relief claims can really add up too, even for the smallest of companies. In fact, latest government statistics unveiled in September show that of the total £6.6 billion claimed in R&D Tax Credits in 2020-21, £4.2 billion was claimed by SMEs. So don’t fall into the trap of thinking your company or your project is so small it’s not worth it – because with average claims hovering at around £55,000 it certainly is!
How can start-ups specifically benefit from R&D Tax Credits?
There are several really important ways in which start-ups will benefit from a successful R&D Tax Credits claim. For instance, you don’t have to be turning a profit to claim R&D Tax Credits, which clearly many start-ups won’t be for the first year or more – good news indeed. Furthermore, many innovative new companies also don’t typically employ a lot of staff, with the ones that are there often focussing heavily on R&D activities. This means that a large proportion of the salaries and benefits of these employees can be included as eligible costs in any R&D tax claim. Plus, any software and materials that are used in the process of the R&D work can also be claimed, as well as any subcontractor costs. To put it plainly, start-ups and very small SMEs often find that a large percentage of their business costs can be claimed back using R&D Tax Credits. It really helps offset the financial risk too!
Finally, having successfully claimed R&D Tax Credits your company may well be looked on more favourably as a credible hub of innovation by potential investors. Let’s not forget too that the award itself can be a sizeable financial injection to be spent exactly as needed. Many start-ups will use the extra cash to pay debts or buy stock, while others plough it back into more R&D projects and growth.
Looking to claim R&D Tax Credits? Consider using an R&D claims portal
The R&D Tax Credits scheme has gone through many iterations over the years with some recent expansions. But unfortunately, the claims process itself is still something of a headache. In fact, it’s infamous for its complexity, which is why many small companies turn to online R&D claims platforms to put their claim together. Such platforms also tend to be the lower cost option when compared to a full R&D claims consultancy service.
So what is the biggest sticking point that makes claiming R&D Tax Credits so difficult? Usually, it’s knowing exactly which of the project’s unique R&D costs can actually be included in a claim and which cannot. It’s really easy with R&D tax claims to include costs that aren’t relevant – and you can bet your bottom dollar HMRC will spot it. Questions will certainly arise if they do, with HMRC also within its rights to launch a wider tax investigation if it suspects inconsistencies. Definitely something you’ll want to avoid.
Being too cautious is not a good way forward either though, as all you’d do then is leave money on the table that rightfully belongs to your company.
There are several online R&D claims portals out there, so you’ll need to do your homework. Any portal worth its salt will have been developed by experienced R&D tax professionals and be securely accessible 24/7 online. It’s also helpful if the one you choose integrates with other backend systems like Xero, and there should be full support on hand at all times – particularly when it comes to verifying eligible (or ineligible) costs.
Although the R&D Tax Credits scheme has been around for over 20 years now, far too many companies are still missing out. Many start-ups and SMEs in particular believe they’re too small or that their project is too insignificant to qualify. But where any technical or scientific uncertainty has been addressed that wasn’t clear from the outset, a claim could well be found. And in these harsh economic times, the resultant funding could mean the difference between being a successful entrepreneur and not.
