Is your start-up missing out on government support?
R&D tax credits offer a vital cash boost to innovative small businesses. Find out if your start-up qualifies with this explainer guide from ForrestBrown
As Britain prepares to part company with the EU, it’s more important than ever for UK start-ups to be aware of the financial support on offer to ensure they maintain a competitive advantage.
The UK boasts a globally competitive package of incentives that helps it, in the current government’s words, ‘to be one of the best places to start and grow a business’.
One area of government support that is being increasingly adopted by UK business is the research and development (R&D) tax credit, which provides a cash boost to companies that can demonstrate the fact they have innovated.
But is the scheme doing its intended job of kick-starting innovation among smaller businesses and start-ups? Recent research from ForrestBrown, which surveyed 1,000 business UK leaders ranging from start-ups to larger corporations, found that only 5% of small businesses with 1-50 staff had used R&D tax credits, compared to half of all businesses employing more than 500 staff.
The picture that this research paints is that R&D tax credit incentives are doing more for large businesses than for small businesses. This is obviously not the intention of the scheme, which is significantly weighted in favour of small businesses in its generosity.
Which businesses qualify for R&D tax credits?
Under the small and medium enterprise scheme, your business could qualify for R&D tax credits if you have:
- Fewer than 500 staff
- Turnover not exceeding €100m
- And/or gross assets not exceeding €100m
What are the benefits of R&D tax credits for start-ups and small businesses?
Businesses can claim back up to 33.35p for every £1 spent on qualifying R&D.
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Large companies, by comparison, must apply for relief through the R&D expenditure credit (RDEC) scheme and receive up to 8.8p for every pound. Take a look at the case studies below to see how your business could equally benefit.
Examples of start-ups who have benefitted from R&D tax credits
Raising IT is a tech start-up based in London, working exclusively with charities and non-profits. It is the UK’s leading charity website and fundraising platform, used by hundreds of top charities to create impact and boost income.
Since 2014, the company has made use of R&D tax incentives – using a consultancy to make its submission, knowing that it didn’t have the experience or know how to maximise this opportunity its own. While it doesn’t rely on this cash each year, the bonus of receiving a cash payment gives it the confidence to invest, making new hires and accelerating product innovation.
Without state support it would still innovate, says its COO Adam Popeck, but not at the pace that the R&D tax credit scheme allows it to. For that reason, it is this type of funding that really works for Raising IT.
Sebastian Conran, founder of product design studio Sebastian Conran Associates (SCA), says state support – including grant funding and R&D tax incentives – helps put Britain on a level playing field with the rest of the world.
SCA is a design studio which focuses on creating products to enhance peoples’ experience of life. Many of its products are designed to aid an ageing population, including robotic wheelchairs and autonomous assistive devices.
SCA has used the UK’s R&D tax credit incentive to enable it to accelerate the design and development of life-enhancing products for those that need them.
How can businesses apply for R&D tax credits?
You can either use an R&D tax credits consultancy, who will submit and manage applications on behalf of your business, or you can make a claim yourself via your company tax return.
You will need to tick the appropriate boxes (as highlighted below), calculate your benefit based on your R&D expenditure and provide a written report explaining how your innovation meets the government’s definition of R&D.
You should enter an X in the box at 650 (version 1) or an X in the box at box 99 (version 2) on your company tax return.
You can find more information on applying for R&D tax credits here.
Why aren’t more start-up businesses using R&D tax credits?
For those companies we work with that are successful in claiming relief, the benefit is significant. In our experience, the barriers to uptake are a lack of awareness and issues of accessibility.
For owners of start-ups, simply finding the time and head space to get to grips with tax credits is a major factor.
Knowing whether you qualify is another barrier. Start-ups may have accessed another form of funding – such as grants – and therefore assume, in many cases wrongly, that they are not eligible.
Or they might not consider the innovative work they do as qualifying as R&D. We would encourage start-up founders not to assume they aren’t eligible – ask the question of a specialist, as the R&D tax credit legislation is complex and a broad range of activities qualify.
R&D tax credit eligibility checklist
As a starting point, answering ‘yes’ to any of the questions on our R&D checklist suggests further investigation is warranted:
- Have you done something to differentiate your business within your sector?
- Has your business taken on something particularly challenging?
- Has your business taken a risk in trying to achieve something?
- Have you invested time and effort into making efficiency-gains?
- Does your business operate in a market that is specialist, niche or heavily regulated?
- Do you employ highly skilled or qualified technical staff?
With the average annual R&D tax credit claim coming in at £54,000, it is well worth reaching out for help. This amount can prove a valuable source of funding for your start-up and, given that claims are usually paid within six weeks of submission, the process isn’t as drawn out as you might expect.
For those businesses that use R&D tax credits, the cash boost almost always funds further innovation which is the reason it exists in the first place.
It is a real shame that only 5% of small and medium businesses we polled have accessed the scheme and we would urge the remaining 95% to make use of this funding support, which will provide a well-needed boost to future-proof the nation’s highly innovative start-ups.
Jenny Tragner is a director at R&D tax credit consultancy ForrestBrown and a member of HMRC’s R&D Consultative Committee.To find out more go to www.forrestbrown.co.uk