Are you claiming back up to 33% of your development costs?
It's a shame when brilliant ideas are left in limbo before they are able to come alive because of financial constraints. Did you know that most founders underestimate how much time their startup will need to achieve market validation by two to three times? What if one of these businesses runs out of money before anything viable can be completed, then this means that many great ideas are never given the chance they deserve. How many businesses could have succeeded if they had more time and money?
When releasing a product to the market it can take longer than expected before the businesses get the desired return on investment, which can inflate the risk of running out of money. This is why startup success is closely linked to its ability to raise funds. To avoid this from happening, startups should take advantage of the beneficial tax relief schemes that are available.
Research and Development (R&D) tax relief is a valuable government initiative that helps alleviate some of the financial concerns associated with trying to get a tech startup off the ground. Yet, it is also one of the most overlooked sources of financing for a startup.
This relief is designed to encourage and reward companies that seek to advance the overall knowledge in a field by resolving scientific or technological uncertainties. The most important factor here is that the work that you do has to be innovative. How does this look?
For a tech business this could look like this:
- Are you developing new products/processes?
- Are you trying to improve or extend existing products/processes?
- Are you trying to get different systems to talk to each other?
Innovative companies can claim between 19% and 33% of their R&D costs back as a cash credit or use it to reduce their corporation tax liability. With the first few years of a company’s life spent with significant overhead and development costs, by claiming R&D tax relief, you can potentially get back 100% of your developers salary as a relief.
It doesn’t matter whether you are a loss-making business, at the prototyping stage or development stage as long as your business is working on technological or scientific uncertainty and pushing the boundaries of available knowledge in your field, you can claim tax relief or surrender the losses incurred for a cash payment.
How can you claim R&D tax relief?
R&D tax credits are a type of Corporation Tax relief; therefore, it’s tied to your accounting period. You should be on the lookout for any expenses and begin recording the work that could potentially qualify for a tax deduction, especially if you are close to filing your Corporation Tax Return (CT Return). This will help create strong supporting documentation to be submitted to HMRC.
If you’ve already filed your CT Return, don’t worry, you won’t miss out on the relief. The deadline to claim R&D tax relief retrospectively is 24 months from the end of your accounting period.
What will you need?
To support your R&D tax relief claim, you need to submit a technical narrative outlining why the work qualifies for the relief and the calculations that adhere to HMRC’s requirements. The process may sound difficult but with correct tools it isn’t and is definitely worth it! As a startup, there is one main thing you can start doing today to help you create concise, compliant claims?
The best way to make sure you have all the evidence necessary for your technical narrative is by keeping a detailed record of every project throughout the R&D process and who was involved. This will ensure that when it comes time to writing up your report, you’ll be able to easily recall what went into each project and provide HMRC with everything they need as proof that the work qualifies.
Think you qualify?
There are two primary ways you can go about making the claim. You can hire an R&D tax relief consultancy firm, such as Optimal Compliance, that will do the whole process of creating the claim for you, such as talking to the staff to understand the types of projects you do and writing the technical narrative, including all the required financial calculations.
Or, if you prefer to do your R&D tax relief claims in house, there are R&D tax relief softwares like Novel that helps you create the technical narrative from start to finish, including the financial information. If your accounting year end isn’t up yet, you can also use Novel to track your R&D in real time so when it comes to making the claim, all the information is already within the system and you're more than halfway to submitting your claim.
Whichever option you choose, claiming R&D tax relief can be extremely beneficial for your tech startup. It will help ease your cash flow problems and provide extra time to work on your business offerings or even revolutionise the way you work going forward.