R&D Tax Relief for UK Startups: Your Next Funding Round Could be Courtesy of HMRC

There’s an excellent HMRC scheme that gives startups around 30% of their development costs back as cash. Many startups use this as a bridging round, helping them to extend their runway. Remarkably, although the scheme was introduced in 2000, estimates suggest that up to 80% of eligible companies don’t know that they could make a claim. They either remain unaware of the scheme or wrongly assume that they won’t qualify for it.

What is R&D Tax Relief?

R&D Tax Reliefs are tax breaks put in place by the UK Government that aim to encourage companies to spend more on R&D in the UK and in turn benefit the UK economy. They’ll reimburse around a third of everything spent on what they call qualifying activities, which includes aspects of building new products as well as developing IP.

What qualifies

The scheme is remarkably inclusive and a wide range of UK companies are eligible for either a cash payment or a corporation tax reduction if they spend money on qualifying research and development.

Companies in any sector can be eligible, however sectors where R&D is most frequently undertaken include: Software development, manufacturing, engineering, construction and pharmaceuticals.

For the purpose of tax credits, the core criteria is that your company is:

1.  Seeking to create an advance in the field of science or technology

2.  Overcoming scientific or technological uncertainty in order to achieve this.

But that doesn’t necessarily mean a startup’s technology needs to be cutting edge scientific research. R&D credits are aimed at incentivising novel technical or scientific activity with commercial applications, not University / academic research.

In fact, you might be hard-pressed to find a startup that doesn’t qualify for R&D tax credits.

When putting together an R&D tax credit claim, here are the following types of costs which could be recouped if a company has undertaken the qualifying activities above:

• Direct staff costs including salaries, employer’s NIC and pension contributions
• Subcontractors and freelancer costs
• Expenditure on materials and consumables that are used up or transformed by the R&D process
• Expenditure on some types of software

If eligible, startups can typically claim R&D tax relief for the most recent two accounting periods. In other words, the claim can be made in a 2020 accounting period using costs incurred during the 2019 and 2018 period can.

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