If you’ve launched one of these new-fangled tech startup contraptions, the likelihood is that you’re already feeling the pinch pretty hard. Unless you’ve got yourself a sugar daddy, a fairy godmother or a rich maiden aunt, money is most likely to be in short supply for some time to come. We can’t all be Elon Musk overnight.
The good news is that there are ways to get more than a little extra out of your tax situation, providing you can prove that your company qualifies for what are known as R&D tax credits (R&D stands for research and development). These are essentially a tax break created for science and tech-related companies, and come in the form of tax bill reduction (for limited companies) or possibly even a cash lump sum (a tax credit; for SMEs) from HMRC.
Interested? Of course you are! Read on…
How do I qualify for R&D tax credits?
As always, HMRC have created an almost impenetrable description of what they consider necessary to qualify for R&D tax credits. Ready? Take a deep breath…
Your company can only claim for R&D tax relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.
So how does that sound in everyday English? Effectively, they’re saying that if your company wants to develop something that will further scientific or technological understanding, and not just for your own fun and enjoyment, then you’re on the right path.
Added to that, you have to be able to show that your company is already trading in an area connected with the R&D, or intends to start doing so based on the results of the R&D. If you’re an SME already receiving tax relief under the SME scheme, then you need to be able to show that you own any intellectual property that may result from the R&D.
If you’re still unsure, the key words in the HMRC sentence are ‘technological uncertainty’. If you have a business-related idea that you feel may be a winner but needs investigating first, then things look reasonably good. Even if a competitor has developed something similar, provided they haven’t yet taken it to market, you could qualify for R&D tax credits.
What could I get from R&D tax credits and how are they calculated?
It’s really important to underline a previous point. What an entrepreneur and HMRC considers qualifying R&D are likely to be two very different things. You really need to be researching an area that is connected to your business rather than something that has taken your fancy that you feel you might like to get into.
Of the two tax break options, the SME route provides the bigger relief. The tax relief on allowable R&D costs is currently 230%, which means that for every £100 you spend on qualifying R&D, your company could increase its expenses (in the eyes of the taxman) by an extra £130. That’s on top of the original £100 spent.
To put it simply: HMRC will treat every £100 of R&D expenditure as if it had cost your £230. Not half bad, eh?
As we said earlier, it is also possible it may be payable as a cash credit, calculated (for loss-making SMEs) at 14.5% of the qualifying R&D expenditure. A qualified accountant would be able to help you look into this.
What should I do next?
Further research can be done on the gov.uk website, although we can’t guarantee they won’t bamboozle you with more gobbledegook. Alternatively, get on the phone and contact My Accountant Friend. We’d be happy to talk you through your situation and help you begin the process of seeing whether you qualify for R&D tax credits. Give us a call. Bizarrely, this kind of conversation really makes our day!