Why Every Start-up Should Understand R&D Tax Credits
Starting a business is not easy. Taking the plunge to set out on your own takes courage, commitment, and a reasonable amount of self-confidence.
It’s also a financial risk and carries with it a high chance of failure – according to the latest ONS figures, more than half (56%) of Welsh businesses fail in their first five years.
So anything that helps a start-up survive those difficult early years has got to be welcome. And for those that are developing innovative ideas, claiming R&D tax credits could be a lifesaver.
Why do many start-ups fail?
There are many reasons, but especially for science and technology companies there can be a long period of product development before the company sees any revenue.
And this pre-revenue period can often turn out to be a lot longer than expected if the development proves to be more difficult than anticipated. In these circumstances, any financial help a company can get can be a lifeline.
It’s true that some product development work does not qualify for R&D tax credits. The Government has set particular criteria that has to be met.
The R&D has to be in the science and technology field, so something that was looking at how consumers might respond to a new product or service would probably not qualify (e.g. market research).
It has to be aimed at resolving some real uncertainty about whether or not some advance or new idea might work. If it’s something that any reasonably competent professional in that field could work out fairly easily it probably wouldn’t do.
And it has to advance industry level knowledge, not just be something that was particular to your own company. At the same time, it has to be related to the trade your company is in.
That might sound like a difficult set of conditions to meet. But never assume that the work you are doing doesn’t qualify for relief. Always ask an expert – they may be able to identify some part of what you are doing that can attract help.
And if you are just a subcontractor doing work that is a small piece of a larger R&D project, you may still get relief. Crucially, the work does not have to have been successful to qualify.
What does the relief cover?
The costs you can claim for include salaries, national insurance and pension contributions of staff directly involved in the R&D or indirectly supporting it, including supervisors and managers. You can also include agency staff and subcontractors.
It also includes materials used, a proportion of your utility bills and any software purchased. The design, construction and testing of prototypes is also covered.
Most start-ups would come under the SME scheme, which allows you to deduct 130% of your qualifying costs from your annual profits, on top of the normal 100% to make a total of 230%.
If the company is loss making it can claim 14.5% of the loss as a tax credit. This equates to up to 33p for every £1 spent on R&D as a cash payment from HMRC.
No start-up doing R&D work that might qualify can afford to ignore that sort of assistance.
