Why the R&D Tax Credit Scheme is MADE for Start-Ups (& How to Take Advantage of It)
Start-ups are usually born from exploiting a gap in the market with a new, innovative idea
But, for most start-ups, turning the spark of an innovative idea into a profit-making reality is fraught with financial risk: What if it fails? What if you run out of money? What if it takes more time than you expected?
This is what makes the government-funded R&D tax credit incentive ideal for start-ups.
What is the R&D tax credit scheme?
The R&D tax credit scheme is a government-run incentive. It’s designed to encourage companies to invest in R&D and innovation by allowing them to claim up to 33.35% of their R&D spend as either a reduction in Corporation Tax or a cash repayment.
There are two branches of the R&D tax credit scheme: one for SMEs and start-ups (SME scheme) and the other for larger, more established corporations (RDEC scheme). For more information on the two schemes, read this: SME vs RDEC: R&D Tax Credit Schemes Explained.
As this post is focused on start-ups, we’ll be looking at the SME scheme only today.
Is the SME R&D tax credit scheme right for you, as a start-up?
Before we get into the nitty-gritty of what the SME R&D tax credit scheme can offer start-ups like you and if you’re eligible to claim tax relief, let’s first check if this is the right scheme for you.
Do you have:
- Less than 500 members of staff?
- A turnover of less than €100m?
- A balance sheet under €86m?
If so, then this is the right scheme for you. If not, check out the RDEC scheme.
What can the SME R&D tax credit scheme offer you, as a start-up?
If you’re making a profit, the SME branch of the R&D tax credit scheme will enable you to deduct 130% of your eligible R&D expenditure from your taxable profit. And it gets better: This is on top of the standard 100% deduction, which means you can get a 230% tax deduction in total.
But as a start-up, especially one that’s just starting out, you might not be turning a profit yet. Don’t fret. This scheme also enables you to make claim a tax credit for up to 14.5% of your surrenderable losses.
What types of projects, costs and activities are eligible for SME R&D tax relief?
The R&D tax credit scheme is for any company, regardless of industry, that is either:
- Creating a new product, process or service
- Modifying an existing product, process or service
If you are doing either of those, then you can make an R&D tax credit claim for the following expenses:
- Staff costs
- Agency workers
- Software license costs
- Consumable items such as heat, light, and power, and materials and equipment used or transformed by the R&D process
- Payments to the subjects of clinical trials
In terms of eligible activities you and your employees might be carrying out, you might be:
- Generating ideas for new products or services
- Gathering information about the new products or services
- Designing your new products or services
- Developing a prototype of your new products or services
- Building or modifying a production process for your products or services
Now we know what the R&D tax credit incentive is and what sort of projects, activities and expenses you can claim R&D tax relief for, let’s get into why this scheme is perfect for start-ups.
What makes the SME R&D credit scheme ideal for start-ups?
As we established at the beginning of this post, a start-up is usually formed to fill a gap in the market. This means that the products or services that they’re developing to plug the gap have never-been-done-before and need heavy research and development to bring them to fruition.
Having to fund the R&D work yourself can be tough. Especially as there are no guarantees that your idea will work.
This is why the R&D tax credit scheme is perfect for you. If the R&D work you’re doing is eligible for R&D tax relief, you could receive a much-needed cash injection to help cover the costs of resources, utilities and other expenses that are needed for your R&D work.
For instance, if you’re a new start-up, chances are you don’t have many employees yet. But the employees you do have (even if it’s just yourself) are probably focused on R&D activities to help get the business off the ground, right? So, you can include their gross pay, NI, reimbursed expenses and employer's pension contribution in your R&D claim.
How can start-ups claim under the R&D scheme?
But how do you make an R&D claim? How do you know for certain if your projects, R&D activity and associated costs qualify? And how can you make sure you get as much tax relief as possible? And isn’t the whole R&D tax claim process meant to be a lot of effort for not a lot of return?
Well, you could hire an R&D tax specialist like Myriad Associates to help you pull together and file your R&D tax claim.
But if that’s a little pricey for you, there is another way…
Use Tax Cloud
Tax Cloud is an online R&D tax relief portal. It’s designed to help you gather together all the required information for your R&D claim, create a comprehensive claim report, and then file it with HMRC in just a few simple steps.
It takes you through each step of the R&D claims process and gives you unlimited access to the team of Myriad Associates R&D tax advisors, who will answer all your questions and check your report to make sure you haven’t missed any eligible costs and that you get the maximum amount of R&D tax relief possible.