The Government’s R&D tax relief scheme could provide start-ups and scale-ups with a valuable cash boost.
R&D tax relief has been available since 2000, when the Government introduced the scheme to encourage scientific and technological innovation within the UK. It is not only aimed at projects involving ‘men in lab coats’, but applies to many R&D activities even where the task does not include ‘blue sky’ innovation or creating something truly novel.
An R&D project could qualify if it involves significantly enhancing an existing system or experimentally developing a solution where the outcome is not easily available. If your start-up undertakes activities that could meet that description, it would be worth assessing eligibility for a claim.
R&D tax relief claims can be highly beneficial for growing start-ups. Following a successful claim, they can receive up to 33% of the total R&D costs as a cash injection.
Tech start-ups are encouraged to consider whether they could benefit from the scheme. Remember that the Government established the relief to encourage ‘innovative activity’ – and this takes many forms. The scheme is there to reward companies that have attempted to overcome scientific, technical or maybe even business challenges through the creation or enhancement of solutions.
Essentially, R&D tax relief focuses on projects that are “seeking an advance in science and/or technology” through the “resolution of scientific and/or technological uncertainty”. This wording is not particularly easy to interpret and can lead people to overlook potentially eligible R&D costs. For example, some activities may not be considered to be resolving uncertainties. But if you are trying to improve a process in your start-up, there will usually be an element of uncertainty about its success. The costs associated with resolving that uncertainty could, therefore, be eligible for an R&D tax credit.
In BDO’s experience, once they have been engaged to prepare an R&D tax relief claim, it takes an average of two months to gather all details and submit the claim to HMRC. This will vary depending on the complexity of the projects involved and the availability of the applicant company to address any queries. Once the claim is submitted, you can expect to receive the cash benefit of a successful claim within four to six weeks. The whole process could, therefore, take just three to four months from start to finish.
To help streamline the claims process, companies could keep records of any new development activity, noting any areas of that development that took longer than anticipated.
There is always the possibility that HMRC could conduct an enquiry into a claim – even if only due to a random selection process. The reality is that if your R&D claim has been prepared professionally and correctly then the risk of your claim being successfully challenged is low. BDO’s knowledge of the legislation and use of both engineers and qualified software developers helps ensure that their claims are both accurate and justified.
BDO also work on a contingency fee basis, so they only earn fees for successful claims. If your R&D tax relief claim is the subject of an enquiry, BDO will defend it for free.
Increased benefit over time
Staff costs usually contribute the largest part of any R&D tax relief claim. If your start-up is in its infancy, with a small handful of staff who get involved in R&D activities, you will probably find that the benefit quantum for a single year is not that significant. However, as the scheme allows you to look back between two to three years, making a claim for multiple years could deliver a more material cash benefit for your business. If the cash injection enables your business to grow faster than expected, future claims could become gradually more substantial.
BDO has helped many tech start-ups make successful R&D tax relief claims and are specialists in identifying the key qualifying elements of a project. In BDO’s experience, even companies that don’t think they spend any money on R&D may well be doing so. Even briefly exploring the possibility of claiming R&D tax relief is often time well spent.
Eyad Hamouieh is a partner at BDO and holds a Bachelors in Electronic Engineering along with a Masters in Science from Heriot-Watt University, giving him a practical understanding of the work eligible for R&D tax claims. Find out more at www.bdo.co.uk