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R&D Tax Credits for startups made easy. What are they? Who is eligible?

Written by
Daniel Forrest
Last updated
28th September 2021

R&D tax credits can transform your business and provide much needed cash. Daniel Forrest, Co-Founder of Inovasi explains all about them and what they could be worth to your startup.

What is R&D Tax Relief?

The R&D scheme is a UK innovation incentive that offers either a reduction in tax for profitable companies or tax credits in the form of cash from HMRC for loss-making companies. The scheme is aimed at incentivising companies to spend money on R&D by allowing you to get back up to 33p for every £1 spent on qualifying R&D. The scheme was introduced in 2000 and over £9.5 billion has been claimed since the inception of the scheme.

How to claim R&D Tax Credits?

You claim your R&D tax relief/credit in your CT600 return. On line 660 of your Ct600 you enter your total enhanced R&D expenditure. In most cases however, you will need to send an R&D report to HMRC’s R&D team so they can check the claimed R&D expenditure & activities lines up with legislation. It is recommended to use a professional to help you with this. Inovasi can help you with every step of the process.

What costs can I claim for?

While there are many things you can claim for, and it is always advised to have a professional guide you with this, here are what makes up the vast majority of most claims:

  1. Employee costs - You can claim for salaries, wages, class 1 NIC, and pension fund contributions for staff engaged in the R&D project. Salaried directors and a fair proportion of indirect supporting staff can also qualify. Employee expenses can qualify sometimes.
  2. Consumable costs - The cost of materials and the proportion of water, fuel, and power consumed in the R&D process as well as prototypes, provided they are not being sold. Heating and lighting if charged separately from rent.
  3. Software costs - You can claim for the cost of software that is used directly in the R&D and a fair proportion of software only partly used for R&D.
  4. Subcontractors & EPW’s - You can claim for 65% of the costs of subcontracted R&D or Externally provided workers for an R&D project.

What are ineligible R&D costs?

There are many costs that are outside of the scope of an R&D claim, below are the most common expenditures companies think they can claim:

  1. Capital expenditure - Capital expenditure is not eligible; however, a generous 100% research and development allowance may be due on capital assets, such as plants, machinery, and buildings used for R&D activity.
  2. Patent costs - The cost of patents is not eligible however you may be able to claim up to a 9% reduction in your corporation tax for qualifying IP generated costs with the patent box scheme.
  3. Rent or land - Rent or rates and costs of land are not eligible expenditures under the R&D scheme. If heating and lighting are charged separately from the rent they are eligible.
  4. Production & distribution - The cost of production and distribution of goods and services is not eligible expenditure under the R&D scheme.

What is R&D (as far as HMRC are concerned)?

HMRC has its own strict definitions of what they consider to be R&D, that being said their definition is still very broad and applies to nearly every sector in some capacity. A technical advisor can help you figure out what is and isn’t R&D under the scheme.

  1. You should have sought a technical advancement - It should aim to create an advance in an overall field. It should research or develop a new process, product or service or improve on an existing one.
  2. This advancement should be within a field of science or technology - It should have aimed to create an advance within science or technology. For R&D tax credits social sciences, humanities and the arts are not applicable. Also, “commercially innovative” is not enough. For example changing a business process.
  3. The sought advancement should have had technological uncertainties - It should be difficult for a professional in this field to figure out how to solve the uncertainty, often this can show itself in trial and error or lots of iterations and research needing to be done.
  4. The technological uncertainties were attempted to be overcome by a competent professional - It is important that the technical lead for the R&D project is a competent professional within the science or technology you aimed to advance. This can be qualifications or experience.

How much money can I claim back with R&D tax relief?

Under the SME scheme, profitable companies are able to claim tax relief of up to 24.7% of your R&D expenditure. For a loss-making company, you can claim a tax credit of up to 33.35% of your R&D expenditure.

If you are a large company or an SME claiming R&D on a project which received a grant you can claim under the RDEC scheme which allows you to claim up to 10.53% of your R&D expenditure.

What is the difference between SME & RDEC schemes?

The SME scheme is open to SME’s, which is defined as fewer than 500 staff, less than €100 million of turnover, and less than €86 million gross balance sheet assets.

The RDEC scheme is open to large companies or SME’s in certain circumstances, such as having received a grant or having been subcontracted by a large company.

Can I claim R&D tax credits if I received a grant?

The ability to claim R&D tax when you have also received grant funding depends on the type of grant you received and what the purpose was. For example if you are an SME and you have received a Innovate UK smart grant you may be able to claim under the RDEC scheme for that grant. It is very important to get advice on how any potential grant funding could work with you R&D claim.

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Do I need to be profit-making to claim R&D tax relief?

No, you can claim under the R&D scheme even if you are not profitable and have not yet paid any corporation tax. If you are a UK registered SME subject to normal corporation tax but just haven’t paid any yet, you can claim a tax credit as a cash payment from HMRC.

Does my project need to be successful to claim R&D tax credits?

No, the project can fail and you can give up on it and you can still claim R&D tax relief. As long as you sought a technical advance and there were technological uncertainties for a competent professional this is valid. Failure like this is often a great display of the fact the technological uncertainties were great. The aim of the scheme is to minimise risk for companies trying to innovate, hence relief can still be received even in failure.

How far back can I claim?

With the R&D scheme, you can claim back for the previous two accounting periods.

For example, if your end of year is November and it is currently September 2021, you can claim for the accounting periods ending Nov 19 and Nov 20. As soon as the current period ends you will not be able to claim Nov 19 and the previous two are now Nov 20 and Nov 21.

What is the PAYE cap on R&D claims?

As of the 1st of April 2021, there is a new cap on R&D claims linked to the PAYE costs of the company. Claims will now be capped by £20,000 + 300% of the PAYE/NIC payments. As well as this, if over 15% of the R&D expenditure is subcontracted out to a related party it can disqualify your R&D.

If you develop qualifying intellectual property it can uncap the PAYE cap, however, it will not uncap the related party subcontractor cap.

To find out more about the R&D scheme please visit www.inovasi.co.uk or get in touch with Inovasi at hello@inovasi.co.uk

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