R&D tax credits are changing from April 2023 - find out how it could affect your business
Find out how the qualifying cost categories and rates are changing for the SME and RDEC schemes and how corporation tax...
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:
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!
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.
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).
There’s one more thing you might not know about R&D – just how fast it is to claim on SeedLegals. Before now, an R&D claim meant endless spreadsheets and time-consuming and expensive back-and-forth emails with accountants. Now you can prepare your claim in hours online on SeedLegals.
Our streamlined workflow makes sure to capture all the details you need to send HMRC, and you can connect straight to Xero to automatically add your costs in the right place. Plus, your dedicated R&D tax credit specialist will check over your entire claim. We don’t just check it’s 100% correct, we’ll work to maximise what you get back. And it’s no win, no fee – in the unlikely event your claim isn’t successful, you’ll get your fee refunded.
Have any questions about R&D? Want to check your eligibility? Book a call with one of our R&D experts today.