There’s a lot of uncertainty with startups, and resolving uncertainties usually comes at a cost. Fortunately, UK startups can mitigate this risk to a degree with the research and development (R&D) tax relief scheme that could result in a nice big cheque from HMRC for your work on new innovations.
We recently caught up with Jenny Tragner and Emily Williams from R&D tax credit consultancy, ForrestBrown to chat about the scheme, how it applies to startups, and how you can make a claim.
What is R&D tax relief?
“Research and Development (R&D) tax relief (or credit) is a company tax relief that can either reduce a company’s tax bill or, for some companies, provide a cash sum. It is based on the company’s expenditure on R&D.”
The R&D tax relief scheme was introduced in 2000 to encourage SMEs to invest in research and development, increasing innovation in the UK and boosting the economy. “As more innovative companies push the boundaries of technology” says Jenny Tragner, Director at ForrestBrown, “they are incrementally moving the UK forwards.”
Under the scheme, businesses can claim up to 230% corporation tax relief on R&D costs. So for every £100 you spend on R&D, you could reduce your company’s taxable profits by an additional £130 on top of the £100 spent, a tax saving of £26, potentially wiping out your corporation tax bill entirely.
If your company makes a loss, and therefore pays no tax, you could carry that forward and get the reduction on a future corporation tax bill, or choose to receive R&D tax credits – a cash sum paid to you by HMRC.
So what exactly qualifies as R&D, and what costs can you claim back?
What is R&D?
“For there to be R&D for the purpose of the tax relief, a company must be carrying on a project that seeks an advance in science or technology. It is necessary to be able to state what the intended advance is, and to show how, through the resolution of scientific or technological uncertainty, the project seeks to achieve this.”
There are two key concepts to understand before you can decide what costs you can claim R&D tax relief for:
- advances in science or technology
- scientific or technological uncertainty
While there are guidelines, these concepts are still relatively subjective. We asked Jenny and Emily to explain what the terms mean for technology startups, and what sort of costs you can be claiming for.
Advances in technology
In order for your costs to qualify for R&D tax relief, they must be attributable to a project that aims to create an advance in technology. This is, generally speaking, a project that:
- Seeks new scientific or technological knowledge which is not in the public domain or readily deducible.
- Creates or makes an appreciable improvement to an existing product, process or service through technological changes.
- Increases overall knowledge or capability in the field of technology.
It’s important to note that this doesn’t mean you need to be creating some life-altering technology. It’s not about changing the world, but more often, about making incremental advances in the field of science or technology, that could inspire future innovation.
If you’re trying to make a product that is similar to an existing one, but perhaps more cost effective, and no public information exists about how the other product has been created, your work is still R&D, says Jenny. “Apple and Google might have technologies, but it’s not publicly known how they created them. If you try to duplicate that, you’re still making an advance if the solution is not readily deducible by a competent professional, even if you know that some people are doing it already.”
However, routine copying or reverse engineering of existing products, processes, materials, devices or services will not be R&D.
What if your project fails? “Failure is fabulous!” says Jenny. “You need to be seeking to create something new or something better, whether or not you achieve this. By failing, you can still be extending overall knowledge.”
It’s not just direct work on the project that you can claim for. Any work you do to achieve the advance in technology, through the resolution of technological uncertainty, counts as R&D.
“Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.”
What challenges did you face? What risks did you have? What didn’t you know at the outset of this project? How did you go about resolving that?
For example, if a piece of technology is very new and there’s not a lot out there that is known, and you do something that extends its capability, you are creating an advance in technology by resolving the uncertainty that this piece of tech can achieve this result.
This doesn’t include getting yourself up to speed by, for example, learning a new programming language that’s already known or simply doing market research. However, training staff with the skills they need to work on an R&D project would count, as it is helping indirectly to make an advance in technology.
As there is some ambiguity around what counts as an ‘advance in technology’ and ‘technological uncertainty’, the scheme requires that, for projects to be eligible, they must be assessed by a ‘competent professional working in the field’.
Jenny describes a competent professional as “someone who has the relevant skills, experience and qualifications to understand what the technological baseline is in that field…. As competent professionals you need to be up to date on this stuff. You should know what else is going on, not necessarily to the Nth degree but you do need to look at what other people have done/ are doing and consider if there’s a simpler solution.”
Your competent professionals could be a team. For example, your CTO would likely have the best technical understanding, but your MD might have a better understanding of what competitors are doing. In that case, it would be best for both to work together.
What costs can you claim for?
“R&D starts when the uncertainty starts” says Jenny, “and stops when you’ve resolved those uncertainties or you’ve abandoned the project. The activities you claim are all those activities that directly or indirectly support the resolution of those uncertainties.”
Direct support is likely to include staff salaries for anyone working on the project (developers, project managers, external consultants or subcontractors) for the duration of the work they did as well as purchase of products or licenses that support the work. You can also claim for employer NI and pension contributions too.
Indirect support could include a portion of HR staff salaries, for time spent paying the staff doing the R&D work, office administration etc.
How to claim
You claim R&D tax relief by checking a box on your Corporation Tax return and including your expenditure on R&D multiplied by 230%.
While it’s not a legal requirement, HMRC recommend sending some supporting documentation to back up your claim.
If you haven’t been keeping accurate logs of time spent on R&D work, reasonable, quantified judgements can be used to apportion time to eligible work.
“HMRC are very accommodating for the first couple of years of claiming and accept that some judgement often needs to be applied for early stage startups”, says Jenny, “but you need to tighten up these processes as you make more claims.”
While it’s up to your designated competent professional(s) to assess what costs can reasonably be attributed to R&D, it may be worth hiring a tax specialist (many will work on a contingent fee basis) to figure out what you can claim for. As well as keeping you out of trouble with HMRC, a tax specialist can help you get the most out of your claim, rather than selling yourself short out of caution.
If you haven’t explored R&D tax relief for your company, we recommend doing it now. You might even be able to retrospectively claim for last year.
The R&D tax relief scheme is there to support exactly the kind of innovation startups are working on, so make sure you’re making the most of it.