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How can start-ups benefit from R&D tax credits?

Start-ups grow fast! It’s the only way they can survive. And with the UK economy in a precarious state right now, new businesses need all the help they can get.

The key to any kind of business growth lies in research and development (R&D). This is because, without R&D, new and innovative products, processes, and services can’t be brought to life.

Regardless of what sector or industry a business operates in, R&D aids in streamlining processes, strengthening supply chains, cutting costs and eliminating waste from production. Successful R&D projects also bring valuable experience to your team, developing a competitive advantage that helps the business thrive.

The UK government has long provided a very lucrative financial incentive for companies to innovate by way of R&D tax credits.


What are R&D tax credits?

R&D tax credits enable UK companies to receive an enhanced deduction when calculating their taxable profits for eligible expenditure. The effect of this is either to reduce their corporation tax liability or – if the company is loss-making – the company can choose to surrender those losses to HMRC in exchange for a cash payment.


Are R&D tax credits just for well-established companies or large companies?


Start-ups absolutely can benefit from R&D tax credits. As long as the company is registered for corporation tax in the UK, and has carried out an eligible R&D project with qualifying costs, then R&D tax credits are quite likely to follow.

Don’t fall into the trap of thinking your company or your project is so small it’s not worth it – if your activities qualify then it most certainly is worth considering if you could claim.


How do I know if my activities qualify?

Before considering any claim for R&D relief, you must ensure that your project meets the following criteria:

  • You must have looked for an advance in science or technology and aimed to achieve this advance.
  • You must have had to overcome a scientific or technological uncertainty and attempted to overcome this.
  • This must not be a project that could easily be carried out by another professional in the field.

If you can prove that your project is innovative to your industry and not just your company, and you can detail the specific improvements to the product, system or service, you may be eligible for the scheme.


What if my project is unsuccessful?

It doesn’t matter if the project ultimately failed in its objectives; a claim for tax credits can still be made as long as the eligible types of research were undertaken.


What are the benefits of R&D tax credits for start-ups?

There are several really important ways in which start-ups will benefit from a successful R&D Tax Credits claim, including:

  • You don’t have to be turning a profit to claim R&D tax credits, which clearly many start-ups won’t be for the first year or more!
  • Innovative new companies don’t typically employ a lot of staff, with the ones that are there often focussing heavily on R&D activities. This means that a large proportion of the salaries and benefits of these employees can be included as eligible costs in any R&D tax claim.
  • Software and materials that are used in the process of the R&D work can also be claimed, as well as any subcontractor costs.

Some start-ups often find that a large percentage of their business costs can be claimed back using R&D Tax Credits which helps offset the financial risk too. They can provide a welcome financial injection with many start-ups using the extra cash to pay debts or buy stock, while others invest it back into more R&D projects and growth.


Why use us?

There are many R&D advisers on the market – some good, some not so good. HMRC have had cause to clamp down over the past 12 months after fraudulent activity and ‘boundary pushing’.

Read our previous article about HMRC’s rigorous approach to R&D claims here.

That said, R&D tax credits remain an excellent scheme which can be very beneficial for start-ups. Get in touch if you need our help.

R&D tax credits

The information was correct at time of publishing but may now be out of date.

R&D Tax Relief
Posted by Cowgills
18th April, 2023
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