How to Claim R&D Tax Credits as a Startup Founder: A Comprehensive Guide
If you’re building a startup it’s likely that you’ll qualify for research & development tax credits.
As a startup founder, you’re likely always looking for ways to bring in capital, and to increase your runway. One avenue worth exploring is R&D tax credits. These can be claimed by businesses who engage in qualifying research and development activities.
In this comprehensive guide, we will walk you through everything you need to know about the R&D tax credit as a startup founder. We’ll cover what qualifies as R&D, how to claim your credit, and more.
What are R&D tax credits?
R&D tax credits, also known as Research and Development Tax Credits, are a type of government incentive that rewards businesses for investing in qualifying research and development activities. The purpose of the credit is to encourage innovation and growth within businesses, by providing them with a financial incentive to invest in R&D.
In the UK, HMRC provide tax relief for businesses that are prepared to invest time and money into research and development where this is some uncertainty to overcome. This scheme was set up in 2000 when the UK government recognised that investment into R&D lagged considerably behind other OECD countries and is designed to encourage companies to take a risk in investing in R&D.
How does R&D tax relief work?
R&D tax relief works by allowing a company to either reduce their Corporation Tax liability or receive a payable tax credit.
The SME scheme is one of two R&D tax relief schemes available to companies in the UK. The other scheme is the Research and Development Expenditure Credit (RDEC) scheme, which is available to larger companies that are not eligible for the SME Scheme.
R&D tax credits example
If a company is loss-making, the SME scheme allows for the recovery of up to 33% of eligible R&D costs as a payable tax credit. For example, on a net loss of £100k, the company can receive up to £33k as a payable tax credit.
What companies qualify for R&D tax relief under the SME scheme?
The R&D tax relief SME scheme is open to all UK registered companies undertaking qualifying R&D that meet the definition of a small or medium sized enterprise (SME), which are as follows:
- Less than 500 employees, and;
- An annual turnover of less than €100m, or;
- A balance sheet total of less than €86m.
As R&D tax credits are Corporation Tax relief, sole traders and partnerships are not eligible.
Can startups claim R&D tax credits?
As they are well within the high level qualifying criteria (SMEs with less than 500 personnel and turnover of €100m or less), most startups can apply for R&D tax relief.
What activities qualify as research and development?
For a business activity to qualify as R&D, it must seek to make an advancement in science or technology that relates to the company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.
The advance can be in the form of a new or improved product, process or service. But it must be in the field of science and technology; social sciences and theoretical research do not qualify.
According to HMRC guidelines, you will need to explain how a project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- could not be easily worked out by a professional in the field
What expenses can I claim?
Businesses can generally claim five types of qualifying expenditure:
- Staffing Costs
- Consumable Items – items used up or transformed in qualifying R&D projects
- Software – licenses for software directly, wholly, or partly employed in the R&D activity
- Externally provided workers – staff provided through an external agency
- Subcontracting – there are variations in the rules between the two schemes, so please check the relevant guidance.
What expenses can I not claim?
You cannot deduct any costs that do not fall into the categories listed above. For example:
- The production and distribution of goods and services – including marketing and sales costs.
- Capital Expenditure – this is anything that you buy and own; it is an asset of your business, so in practice this means plant, machinery or vehicles. However, some capital assets used for R&D may be eligible for a 100% R&D Allowance.
- Overheads – overheads have been defined as “indirect costs which cannot be linked specifically to a particular project or activity”. This includes items such as heating, lighting and water rates, depreciation on equipment, office costs and accountancy fees.
- Patents and trademarks – payments for the use and creation of patents and trademarks are not eligible, as these are the cost of protecting the completed R&D. This also includes staff costs in relation to the time spent by all staff on the preparation and submission of such applications. However, from April 1, 2013, the Patent Box legislation allows businesses to apply a 10 percent Corporation tax rate to profits earned from their patented inventions.
How far back can you claim R&D tax credits?
The good news is that R&D tax credits can be claimed for up to two years prior to the date of your claim. This gives you some time to get your business organised and make sure that all qualifying activities and costs are captured.
However, it is important to note that HMRC will only consider claims for past work which are submitted within three years of the end of the relevant accounting period.
Do you have to pay R&D tax credit back?
No, once you receive your R&D tax relief it is yours to keep. You do not need to return any funds if your circumstances change or if your business fails.
How to apply for R&D tax credits: A step-by-step guide
Step One: Determine whether your business meets certain eligibility criteria, including size and industry. See if you meet the criteria here.
Step Two: Decide which type of R&D tax relief scheme you would like to apply for: the SME Scheme or RDEC Scheme. (If you find yourself applying for the RDEC scheme, you’re not a startup!)
Step Three: Gather your evidence. This includes receipts, invoices, and other documents that support your claim.
Step Four: Claim your R&D tax relief by entering your enhanced expenditure into the full Company Tax Return form (CT600). Then use the online service to send HMRC details to support your claim. Alternatively, you can work with a R&D tax claim specialist to file your claim.
Step Five: Await a decision from HMRC. They aim to process R&D tax credit claims for SMEs within 28 days.
If there is a problem with your application for R&D tax relief at this stage, HMRC may contact you for more information or to investigate the claim.
Step Six: If your application is accepted, you can expect to receive a cheque or tax allowance from HMRC!
Can I make my own R&D tax claim?
As a startup founder, you can definitely submit your own R&D tax credit claim! HMRC have published a simple guide to research and development tax relief, aimed at making R&D easier for small companies.
However, it is important to remember that the rules and regulations surrounding R&D tax credits are complex. As such, you may find that you have doubts about whether your business activities qualify for R&D tax relief – or how much you could claim.
There are three main risks to self-preparing your R&D tax claim:
- Lost money – It might be tough to evaluate qualifying activities and expenditures. You might incorrectly claim too much or too little money.
- Lost time – The hours spent completing your R&D tax claim could be better spent building product and meeting customers.
- An HMRC enquiry – Self-prepared claims can contain inaccuracies and errors. Penalties have traditionally been quite rare, but this is no longer the case. If they suspect an error, HMRC can and will investigate R&D tax claims.
As a busy startup founder, it may make sense to work with an R&D tax expert or an accountant who specialises in R&D claims for startups.
What are the best R&D tax solutions for startups?
There are various R&D tax solutions available to startups. They can be broadly categorised into two types: self-service R&D tax software, and R&D tax experts.
R&D Tax Experts
An R&D tax claim specialist will be able to conduct a full review of your business and assess whether or not you are eligible for R&D tax relief. They will be able to help you identify the qualifying activities and costs that you can claim for, and to make the most of your R&D tax credits. They will also help you gather evidence, complete all necessary paperwork, and submit your claim.
However, it is important to note that not all accountants or advisors are experts in R&D claims, so it is worth checking their credentials before proceeding with a claim. R&D claims can be complex and require someone with detailed knowledge of the process, so it is better to fully understand your options before deciding.
R&D Tax Platforms
There are also software solutions available which help prepare R&D tax credit claims. Some of these software solutions are aimed at accountants, and some are aimed directly at startups.
R&D tax software typically helps users identify the qualifying activities and expenditures for their R&D tax claims. It also simplifies the evidence gathering process, and allows users to submit their claims directly to HMRC.
Again, it is important to check that the software you are considering is suitable for your business. Some platforms may be more appropriate than others, depending on the size and complexity of your company.
| Company | Fees / Pricing | Notes |
|---|---|---|
| Claimer.io | 5% of claim. Minimum fee £750 – Maximum fee £10k. |
Start your R&D tax claim with Claimer (10% discount on your fees) |
| SeedLegals | 5% +VAT Minimum fee £990 (No win no fee) |
Start your R&D tax claim with SeedLegals |
| EmpowerRD | Max fees of 5% of your credit Minimum fee £2,000 for processing your claim. |
Start your R&D tax claim with Empowerrd |
| RDvault | Prices start at £749 and are capped at £1,995 for claims under £100,000. For claims over £100,000, the fee is 3% and capped at £10,000. | Start your R&D tax claim with RDvault |
| Inventya | There are no up-front fees payable, with a standard success fee of 18% from the first successful claim | Start your R&D tax claim with Inventya |
| Markel | No upfront fees 20% success fee |
Start your R&D claim with Markel |
| Access2Funding | Fees starting at 18% | Start your R&D claim with Access2Funding |