R&D Tax Credits Guide for Startups

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By Harinder Sandhu, founder and CEO of EmpowerRD

Startups can receive up to 33% of their R&D costs back as cash.

The R&D tax credit incentive scheme continues to be a valuable source of funding for startups, accelerating further R&D investment and fuelling company growth. Although surprisingly, it’s estimated that up to 80% of eligible companies don’t know they can claim.

Rewarding UK innovation

The government introduced the Research and Development (R&D) tax credit incentive in 2000 to stimulate innovation in the UK economy.

Innovation is still very much at the heart of the government’s vision for growth. In this year’s Budget, R&D was recognised by the government as being vital for the UK’s post-Covid recovery. A new £375m fund has been launched for fast-growing startups, and the government has set an ambitious target of raising total investment in R&D to 2.4% of UK GDP by 2027.

Billions claimed by businesses across all sectors

The R&D tax credits 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 2018-2019, £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 figure rises to £81,000.

Most commonly, R&D tax credits are claimed by companies in software development, manufacturing, engineering, construction, and pharmaceuticals. Although, any company developing new products, services or processes; or modifying old ones, may be eligible to claim. At EmpowerRD we’ve supported successful claims from a range of businesses – from frozen cocktail makers to sunglasses designers.

Am I eligible to claim R&D tax credits?

According to HMRC’s definition, any project that “seeks to achieve an advance in science or technology.” can qualify. Furthermore, businesses can claim on both successful and unsuccessful projects.

To get an indication of whether your project could qualify as R&D in the eyes of HMRC, consider the following three criteria:

#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: Driving 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, for example, an engineer, scientist or skilled craftsman.

If eligible, you can typically claim R&D tax relief for the most recent two accounting periods. Read our eligibility guideto learn more.

Which costs can I claim for?

When putting together your claim, you’ll need to identify which costs can be recouped. 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 that are used by the R&D process.)

Identifying qualifying costs can be tricky. Our qualifying costs guide is a good place to start but in most cases, we recommend consulting an advisor before making a claim.

We’ve seen startups transformed by the R&D tax credit they receive. The scheme continues to be a successful driver of UK competitiveness, with the most recent study by HMRC showing that for every £1 awarded in tax relief, an additional £2 of R&D expenditure is generated in the economy.

If your business is doing innovative work, R&D tax credits are certainly worth exploring. Learn more about whether your company could be eligible to claim in our complete guide to R&D tax credits.

About the author

Harinder Sandhu is the founder and CEO of EmpowerRD, which combines the expertise of industry-leading claims advisors with modern technology to deliver an improved R&D claims experience at a fraction of the cost of traditional advisors. Before founding EmpowerRD, Hari was Government Incentives sector lead at PwC. As a member of HMRC's R&D Consultative Committee, Hari also advises the government on the best means to incentivise innovation in the economy. He has processed claims for companies ranging from early-stage startups to blue-chip multinationals like HP and RBS.

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