Running an R&D start-up is tough. There’s so much to think about as you get your passion off the ground and become immersed in driving growth.
It is therefore understandable anything tax-related is pushed to the back of your mind. What many start-ups fail to realise however, is the scale of money they’re missing out on, and how little time it can take to access.
It helps to understand first of all what R&D tax relief is. In short, it is financial support from the government for organisations working on innovative projects associated with science and technology.
There are two schemes: R&D tax credits aimed at SMEs and the Research and Development Expenditure (RDEC) scheme for large companies (though SMEs may also be able to take advantage of this in certain circumstances).
For the SME scheme, businesses are eligible to access R&D Tax Credits to obtain an effective cost reduction of up to 24.7%, while companies in the RDEC scheme can receive a credit up to 9.72% for applicable expenditure, reducing their corporate tax eligibility.
HMRC confirmed they permitted £3.5 billion in R&D tax relief in the 2016/17 financial year.
Despite this, the data shows a large number of start-ups are still failing to claim. But why?
To help understand this phenomenon, we asked innovative start-ups why they have failed to claim, and identified ten common reasons which we will now share with you.
1.They don’t know about them
Quite simply, many start-ups don’t know about R&D tax relief, including tax credits. It may be that they think they don’t have the time or budget to seek in-depth advice on tax matters or have been looking elsewhere for grants and cash boosts.
The good news is that if this is the first time you’ve heard about this scheme, by the time you’ve read this article you’ll know the next steps to take to check your eligibility. This is well worth doing as the SME R&D relief, in particular, is ideal for start-ups looking to progress.
It’s open to SMEs employing less than 500 staff with a turnover of fewer than 100 million euros, or those that show balance sheet figures of less than 68 million euros, so has the potential to include many R&D start-ups.
2. They think they are too good to be true
The old adage that says that “if it looks too good to be true it probably is”, doesn’t apply here. Those who are cynical that HMRC are giving away large sums of cash likely don’t see the bigger picture.
The overarching aim of these tax credits is to supercharge innovation, thereby keeping the UK at the forefront of R&D and, in turn, strengthening the economy and our global reputation.
According to an HMRC report published in September 2018, claims totalling £21.4 billion have been made since the schemes were introduced in 2000, but there are still many more businesses that could benefit.
3. They do not realise they might be eligible
Even if start-ups are aware of R&D tax relief, they may assume they are not eligible to make a claim.
It is true that there are a number of criteria to fulfil to test your eligibility. For example, for both of the schemes, you will need to show that your organisation is currently working on, or planning to work, on an R&D project for new or existing products, processes or services.
You will also need to prove how your project has sought an advance in the field of science and technology (not just in your business), has tried or succeeded in overcoming uncertainty, and is not something that could be achieved without difficulty by an expert in this field.
If you’re in doubt about whether your project counts, a closer look at which kind of projects are eligible will show that the scope is pretty inclusive.
Developing new drugs is an obvious example, but many other industries will be working on eligible projects. Software development to introduce new functionality of existing programs, the design of new equipment used in manufacturing or improving processes through the use of robots are all examples of projects that could be eligible.
4. Their accountant gives them poor advice
Throughout the years we’ve encountered many start-ups who think their ineligible thanks to poor advice from their accountant. Accountants are not specialists in R&D, and, consequently, do not have the expertise required to precisely identify the type of work and projects that are available.
This mistake costs start-ups tens of thousands of pounds every year. While using your existing accountant may seem the economical option, the potential losses mean this is a false economy.
5.They are making a loss so think they won’t have a chance
Making a loss as an SME won’t exclude you from benefits of the scheme. In fact, the way the rules work makes it ideal for start-ups in their early stages before they start making a profit and need a cash boost.
In this instance, the SME can carry the loss related to R&D activities forward to offset against future tax liability, or surrender it for a welcome cash payment. This will amount to 14.5% of the applicable expenditure, or equivalent to 33p in every £ of eligible expenditure.
This rule often serves as a lifeline to companies looking to keep afloat and reinvest in their activities in the difficult early months and years.
6. They are too busy to give it much thought
This is understandable given that it takes time and thought to put in your claim. You will need to work out your allowable expenditure, turn this into an R&D tax relief figure and submit this correctly on your company tax return. And even before you do all this, you will need to work out how your project is eligible and be able to document this.
However, there are some great R&D tools online which mean you barely have to put your fingers to the keyboard. By combining technology and human consultancy, these tools allow you to submit a claim almost instantly, but with confidence of professional oversight. Further, these tools cut out the need for weighty consultancy fees, perfect for start-ups with low cash flow.
If your company is slightly further on in its development, it may make sense to contact a professional R&D specialist consultancy, who can handle the process from start to finish, allowing you to concentrate on what matters.
7. They think they are ineligible due to grant funding
Many start-ups assume the grants they receive make them ineligible for R&D tax credits. This is incorrect.
Many grant funded start-ups claim R&D as an additional source of revenue, allowing them to grow without diluting their equity.
8.They don’t know how to make a claim
In simple terms, your claim is submitted through the CT600 form, the Company Tax Return, but the preparation needed to submit your case accurately can feel overwhelming.
You will need to know which costs, or proportion of costs, will be eligible. Those that count include some of the salaries of staff or sub-contractors working on the projects, materials and utility bills.
You won’t be able to claim for the cost of land, capital expenditure or costs associated with trademarks and patents, amongst other things.
Gathering information and preparation, or seeking help for this, are key before you submit your CT600 to ensure the maximum chance of having your claim accepted. Again, this friction can be avoided with professional help.
9. They think they won’t be worth enough to put the time in to claim them
In its latest report, HMRC says that for 2016-17 the average amount of R&D support claimed by organisations was for a sum of £53,000. For a start-up, in particular, this figure could make the difference between being able to reinvest to continue their business or not.
So, it is well worth the effort of identifying your eligibility and submitting a claim to be able to benefit from tens of thousands of pounds of financial aid. For the same period, 39,960 R&D tax credit claims were submitted, with the vast majority – 34,060 – within the SME R&D scheme. So given a bit of investment in time, you will be in good company when you submit your claim.
10. They assume it’s too late
You can submit a claim up to two years following the end of the accounting period relating to the R&D costs. This has staggering implications for start-ups who have been focusing their efforts on their day-to-day business and haven’t yet submitted their claim. In these instances, the windfall often sizeable and game-changing.
As you can see, there are more reasons to submit a claim than not, and the knowledge and effort required to put it forward accurately will repay you in dividends. Of course, expert guidance from experienced professionals will smooth the path to potentially claiming tens of thousands of pounds to help your business grow. F. Initiatives have a proven track record in guiding their clients through successful R&D tax relief claims and will be only too happy to provide a no-obligation consultation to advise on your eligibility. To take the first step, contact us on 0207 653 1921 or email firstname.lastname@example.org.