For startups involved in tech development, Research & Development (R&D) tax relief can provide an important source of funding through tax deduction or cash reimbursement. But what exactly qualifies as ‘innovation’ and how do you know if your business is eligible?
R&D tax relief is one of the main forms of tax relief available to businesses developing products, processes and services.
It’s a government incentive available to limited companies in the UK. The definition of what falls under R&D is surprisingly broad; in fact, you might be surprised at what qualifies.
Matt Perry, managing partner of Haines Watts, has years of experience in helping businesses handle their finances. He explained that there are huge opportunities for companies in the technology space to claim R&D tax relief.
“There’s a lot of cash available for entrepreneurial businesses, running into billions of pounds. That’s because the government is keen to encourage people to create new businesses, new things, new ideas.”
What can you claim under R&D tax relief?
R&D tax relief tends to be most relevant to problem-solving businesses who are finding new and innovative ways to serve customers. If this sounds like you (and you’ve spent money developing new products or services) then you may be able to claim.
The first thing to be aware of is that R&D claims can be made retrospectively for any suitable activity carried out in the last two years. So think back and question whether your startup can say ‘yes’ to any of the following questions.
- Sought out a more efficient or effective solution?
- Improved an existing product or created a new one?
- Developed new methods or processes?
- Identified problems or issues for customers and found ways to solve them?
What activity can app and software companies claim for?
If you’re developing apps or software, the projects most likely to be eligible are complex ones that have used bespoke coding or involve your team coming up with innovative technology.
This might mean you have:
- Trialled new computer code or materials
- Created web-based applications that you consider to be original and creative
- Developed bespoke software, websites, apps or CRM systems
- Addressed key industry questions or uncertainties
Projects that are unlikely to qualify include:
- Building sites or apps using well-established technologies
- Work related to the user experience, including content and design
Even if your attempts to improve products or processes fail, they may still count as R&D-qualifying expenditure. This can be a big draw for tech startups that are keen to experiment with new ideas but don’t always have the funding to pay for it.
It’s also worth knowing that from 1 April 2023, licence payments for datasets, cloud computing and data processing costs directly attributable to R&D activity will be included in qualifying expenditure.
Understanding how R&D claims work
Every year, over £5 billion worth of R&D tax credits are claimed by more than 60,000 UK businesses.
Small businesses can claim up to 33p for every £1 spent on qualifying R&D activities. The relief provides an uplift on R&D costs which is then offset against corporation tax, or it can provide a cash refund if a business isn’t generating profit.
However, Haines Watts’ Matt Perry warns that it can be tricky to understand the rules about what qualifies and what doesn’t.
“There are a lot of rules over what qualifies as expenditure and about the way you present it as different projects and people’s time. It can be hard to find the right balance and know what you can include.
“Is time being spent purely on research and development or is it just everyday work, for example?”
How to make your R&D claim
Matt advises businesses to seek professional advice to maximise their chances of success.
“You could probably have a stab at it yourself, but I’d be shocked if a decent professional couldn’t enhance your claim and get more out of it. Remember that when HMRC sees something submitted from a professional, they tend to react a lot quicker too.”
To start you thinking about what work will qualify, HMRC has put together a guide on making R&D easier for small companies that walks you through the basics of claiming R&D relief. It includes advice about:
- How to know which projects qualify
- How to show that your project is R&D within the tax definition
- Understanding when an R&D project starts and ends
- Working out what costs qualify
If your startup is relatively new, you don’t necessarily need to wait to build up a whole year’s worth of accounts to claim either.
“As soon as you’re incurring significant expenditure, you should be thinking about when you want to do it. If you’ve had a massive six months with a lot of costs, you can bring that year in and get your corporation tax return into HMRC to get the cash back,” Matt added.