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).
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