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