R&D Tax Relief is a UK govt incentive scheme that allows companies to claim back roughly 30% of the money they spent on product development. That’s huge, for a startup it could be the difference between running out of money or making it to your next funding round.
Surprisingly, many companies don’t realise that they may well be eligible to claim that R&D cashback. Even if you were aware of the R&D scheme, here are some things you may not have known:
1. You don’t need to be a tech company or a laboratory to make an R&D claim
The number of companies that are filing for R&D tax credits has been growing rapidly since the government launched the scheme in 2000. There were over 50,000 R&D claims made by SMEs last year, growing at almost 20% year-on-year. So the scheme is definitely getting better known.
However given there are almost 5.9 million SMEs in the UK there is no doubt that there are still hundreds of thousands of eligible companies that are not claiming, leaving valuable cash on the table.
It might be surprising to some, but many of those companies could have claimed R&D relief regardless of sector or size.
All a company needs to show is that as part of a product or project development it has done, some of that work was done with the aim to make an advance in science or technology. This can be research or development of a new process, product or service or improvement on an existing one, but this is absolutely not limited to deep tech development. In HMRC’s words, “The relief is not just for white coat scientific research but also for brown coat development work in design and engineering that involves overcoming difficult technological problems.”
In the world of startups, that would include black t-shirt software and product development work too!
2. You can claim R&D tax credits for successful and unsuccessful projects
Commercial failure of the product or project does not mean that R&D wasn’t done or can’t be claimed. HMRC looks for the journey, the challenges, the uncertainties, and how the R&D tried to address these. Like SEIS/EIS tax incentives for investors, R&D relief is meant to de-risk development for companies, allowing them to work on things they may otherwise not have been able to afford.
By way of example, a company could work on developing a feature that helps its users find better or more relevant products on the company’s website. But, after spending 3 months of work on the project, the company decides to give up. The good news is that the eligible costs on this project are still likely to qualify for R&D relief.
In fact, there’s often a strong correlation between unsuccessful projects and valid R&D work which can be claimed. As many founders know, AB testing, pivoting and experimenting are all part of a healthy startup development cycle, and very often the work done doesn’t turn into a commercial product.
3. You can claim costs of subcontractors, even if they are not in the UK
The main eligible costs for R&D relief are employee costs, subcontractor costs, software, consumable items, prototyping and clinical trials volunteers.
Many startups (especially in the early days) use subcontractors, and often they are not in the UK. The good news is that the subcontractors don’t need to be UK residents and there is no requirement for the subcontracted R&D to be performed in the UK to claim tax relief on their payment. Furthermore, in this context with subcontractors, a company can claim tax relief of up to 65% of their payment (it’s the same amount regardless of whether they are UK or non-UK subcontractors).
4. You can use R&D Advance Assurance to speed up the approval process of your R&D claim
Within the first 3 accounting periods of the company, the company can apply for R&D Advance Assurance, before submitting the full R&D claim.
This will give companies a guarantee that their R&D claims will be accepted, as long as the final R&D claim will be in line with what was discussed and agreed. In fact the R&D claim will be accepted automatically once it is received (as long as it is in line with the R&D Advance Assurance).
Applying for R&D Advance Assurance is great to help you in planning your cash flow in advance, to save you time to get approved for the R&D claim. You can also use the fact that you got R&D Advance Assurance to increase your investability, it’s a great validation to show investors that HMRC has blessed your work as qualifying R&D activity. And, when you’ve explained to the investors that their money will go further, with your being able to claim back from HMRC roughly 30% of the amount you’ve raised, that means their money will go further, and you can get more customers and traction before needing to raise again.
5. You can play with your accounting year to maximize your R&D claim
Unless you’ve changed your company year end, Companies House will set it based on the last day of the month your company was incorporated. So for your first company year, the first accounting year usually covers more than 12 months.
R&D tax credits are claimed by companies via the company’s tax return (CT600) which are based on the same period as the company’s financial statements.
Now, for different reasons, a company may want to shorten or extend the accounting period (extending is possible to up to 18 months, and can be done at most once every 5 years).
One of the main reasons to shorten the accounting period is when a big and costly project ends, then a company may be short in cash, so shortening the accounting year and claiming the R&D relief early will make perfect sense.
For example, Landscape Ventures Ltd incorporated on 14 June 2019. So the first accounting year end date was 30 June 2020, and the accounts will normally cover the period from 14 June 2019 to 30 June 2020.
But, the company had a big R&D project that ended on 10 January 2020, so in order to get the R&D cash earlier, they can shorten the accounting period to end on 31 January 2020, right after the end of the project.
In another scenario a company may want to extend the accounting period, if for example the company didn’t have any R&D costs at the beginning of the year, but by the end of the year the company started to work on a big project, it would make sense to adjust the accounting period to include the big project and claim the R&D relief several months earlier than would have been possible if the year end had not been changed
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