How R&D Tax Credit Can Help Fund Your UK Startup Expenses

By Micah Levy · Updated March 8, 2022

If you are a startup founder that engages with research and development activity, the R&D Tax Credit program can help you fund up to 33% of your R&D expenses without any dilution!

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What Are R&D Tax Credit?

The R&D Tax Credit scheme is a useful and potentially lucrative funding mechanism for start-ups that have a presence in the UK.

This government scheme has existed since 2000 and was created to encourage innovation in UK companies.

In 2018 the scheme paid companies a total of £3.4 billion. Since many technology start-ups are already innovative by nature, they are often well-suited to the scheme.

Companies can claim annually and receive up to 33% of what they have spent over the year on activities that meet the criteria of ‘R&D for Tax purposes’.

The benefit of the scheme comes in the form of reduction of their tax bill if they are profitable or as a cash payment if they are loss-making.

The costs that can be included in a claim are:

Salaries
subcontractor costs
software licenses
consumables

Are You Qualified?

In order to successfully claim, a startup must be subject to UK Corporation Tax and the activities they are claiming for should meet two criteria in a technology area:

1. The advancement of knowledge and

2. The Resolution of Technological Uncertainty.

This is just a fancy way of saying that you will qualify if you are creating something new (or significantly improving something) while trying to solve difficult technical challenges.

At the very least you should explore your eligibility further.

To bring this into context of a typical startup, here are a few brief examples of software development activities that are likely to qualify:

Developing new algorithms
Using an untested development architecture
Integrating various systems that are not typically used together
Solving scalability, performance or security challenges that fall outside of the industry norm

These are just a few examples and there are countless other ways in which software development projects can qualify.

In addition, while some sectors are naturally well suited to the scheme (e.g. software development, manufacturing, engineering, architecture, biochemistry etc.), companies in any sector can claim providing they demonstrate that they meet the above criteria.

How are R&D Claims Calculated?

The R&D Tax Credit claim value is calculated as a portion of how much you have spend on qualifying activities in a given year.

You can also claim retrospectively for two years, so if you are a start-up that has been trading for a few years and have not claimed previously, you may be able to file a double claim on your first filing.

There are a few other factors that can affect the claim value but below are some typical scenarios for companies with less than 500 employees:

A profitable startup that has spent £100,000 per year on qualifying activities.
Claim value: £24,700 per year
A loss-making startup that has spent £100,000 per year of qualifying activities.
Claim value: £33,500 per year

5 Tips that will help you maximise the value of your R&D claim

If you are an international start-up that is registered in the UK, structure your company in such a way that qualifying activities are paid from your UK entity (e.g. salaries, subcontractor costs etc).
It is preferable to use salaried employees of your UK entity for your R&D activities rather than subcontractors as you will be able to include 100% of their costs for qualifying activities rather than 65%. Also, in this way, if you are loss-making, you will not be subject to the PAYE cap that will be introduced from April 2021. Note: Your employees and subcontractors can be based anywhere in the world.
If you are a Director of a startup and you contribute to the company’s R&D activities, draw a salary from the company rather than being paid via dividends. Dividends cannot be included as qualifying costs.
Poor tracking of project data can lead to guesswork when trying to determine how much expenditure you should be claim. This creates a risk of either claiming too little (and lowering the value of the claim) or claiming too much without providing enough supporting evidence, which could lead to an HMRC enquiry or penalty.
Avoid an HMRC enquiry, which can reduce your claim value or get your claim rejected outright, by providing supporting documentation that includes an accurate narrative that demonstrates why the work being claimed for meets the definition of R&D for tax purposes. Ensure that the start and end of the project are included.

Final Thoughts

While it is not always immediately clear whether a startups is eligible to claim R&D Tax Credit scheme or to what degree they are eligible, we hope that this article has given you some clarity on this topic and that it has encouraged you to explore your eligibility further.

If you would like to get a definitive answer on your eligibility or anything else related to the scheme, click the button below and apply for FREE eligibility check.

IMPORTANT NOTE: This article describes the R&D Tax Credit scheme in the UK. Similar programs exist in the US and Israel. Click the button above and apply for a FREE eligibility check and get our comprehensive R&D tax credit guide.

R&D Tax Credit Calculator (UK)

This calculator refers to companies that have less than 500 employees and generates less than £175M in annual sales!

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