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Guide to R&D Tax Credits for Startups

For growing businesses, maximising cash flow is king, and a successful R&D tax credit claim can be a valuable funding injection.

by Credit Passport

The scheme allows companies to claim up to 33% of their Research and Development (R&D) costs back as cash. We’ve seen startups transformed by the credit they receive, but surprisingly, it’s estimated that around 80% of eligible companies don’t know they can claim.

What is the R&D tax credits scheme?

The government introduced the R&D tax credit incentive in 2000 to stimulate innovation in the UK economy. The scheme provides UK businesses with either a cash credit or a corporation tax deduction to compensate for up to 33% of the cost of research and development. In this year’s Budget, the scheme was very much part of the conversation around the UK’s post-Covid recovery, with the government continuing to recognise that innovative, rapidly-growing businesses will be a key driver of future economic growth.

Which businesses are eligible to claim R&D tax credits?

The scheme is available to businesses in all sectors. If you’re developing new products, services or processes; or modifying old ones, R&D tax credits are most certainly worth exploring. At EmpowerRD, we’ve supported claims from companies across a range of different industries. In 2018-2019, a total of £5.3bn was claimed, driven by a 19% rise in claims from SMEs. The average SME R&D claim in the UK is £53,876 and, in London, this rises to £81,000.

What counts as R&D?

If your project attempts to resolve ‘scientific or technological uncertainties’, it may count as R&D. We recommend considering the following three criteria to get an indication of whether your project will qualify in the eyes of HMRC:

  1. High degree of uncertainty Is the outcome of the project a foregone conclusion? If so, it probably won’t qualify. The project should involve overcoming some form of technological uncertainty.
  2. Drives competitive innovation The new or modified product, service or process should be an advance in its field.
  3. Requires experienced professionals The R&D should be carried out by competent professionals, e.g. engineers, scientists. If eligible, you can typically claim for the most recent two accounting periods. You can also claim if your project was successful. Learn more in our full eligibility guide.

Which costs can I claim for?

So which costs can be recouped? Identifying qualifying costs can be tricky (check out our qualifying costs guide for a more detailed breakdown), but the most common costs that your business will likely be able to claim for are:

  • Direct R&D staff costs (e.g. salaries, employer’s NIC, pension contributions,bonuses)
  • Subcontractors and consultants
  • Consumable items (e.g. software licenses, chemicals, building materials, heat, light, power used by the R&D process)

If you think you might have a qualifying project but are unsure, Credit Passport companies can access free one-to-one consultations with an expert from EmpowerRD.

Get in touch to speak to one of our experts and find out how much your business could be eligible to claim.

Blog Author: Harinder Sandhu is the founder and CEO of EmpowerRD

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