As increased commercial costs and anxieties over the risk of an upcoming recession affect spending, R&D tax relief will prove particularly valuable.

Amendments to the scheme were included in the proposed Finance Bill 2022-23. While the legislation is yet to come into effect, some changes will provide great benefit to British startups when it does. Currently, only a small percentage of companies use the scheme. Out of the 5.6 million existing British SMEs, only 76,225 R&D claims were submitted in 2021. That’s because, in part, too few understand the eligibility criteria.

It’s important to learn how the R&D scheme works to make the most of it. Making a successful claim could help your company extend its runway, improve cash flow, and expand opportunities to scale during this turbulent period of record-high inflation.

Check eligibility for non-scientific projects

An SME with fewer than 500 staff and a turnover of under €100 million, or a balance sheet total under €86 million can claim R&D tax relief through the scheme. But you can’t claim relief for just anything. In fact, the proposed legislation includes some extra form-filling and communication requirements to ensure nobody attempts to trick the system.

Many fail to realise that, even if their project doesn’t involve scientists in white lab coats, they could still be eligible. All that matters is whether the spending - which can go back two financial periods - relates to qualifying R&D activity. “The relief is not just for white coat scientific research,” the government website reads. “But also, for brown coat development work in design and engineering that involves overcoming difficult technological problems.”

For example, if a construction company seeks to develop a new material that can resist certain weather conditions whilst reducing overall installation time and cost, then the expenditure of this initiative may be eligible for R&D tax relief. The same goes for a software development company trying to develop a new or improved system, even if they are using off the shelf tools or applications in order to achieve this. If the project involves overcoming difficult technological problems, it could be eligible.

When the legislation is brought into effect, expenditure on ‘pure maths’ activities will also qualify for relief too. That means, if your startup works with AI, quantum computing, risk analysis, or algorithms, you could be able to include the costs associated with these activities in your claim.

Check eligibility for specific spending

Although the criteria for eligible projects is expanding, you still need to check the spending involved in those projects. Not everything qualifies for R&D tax relief.

For instance, once the amendments come into effect, overseas R&D costs will not be eligible for inclusion in an R&D tax relief claim. That’s because the government wants to make sure the relief is focused on benefitting British companies only. The only exception to this rule is if your company’s activities must be carried out in different geographical, environmental, or social conditions – ocean exploration, for example. Even if you’ve been unable to source the right services in the UK and have to look overseas, the expenditure will not be eligible.

In other respects, eligible spending is expanding. It already includes expenditure like employee costs, subcontractor costs, software, consumable items, prototyping, and clinical trials volunteers. The proposed changes will also allow expenditure relating to cloud systems and datasets, including storage and hosting costs. If your startup has high software costs, this will benefit you the most.

Claim when you fail too

It’s a common misconception among startups that you can only claim R&D tax relief when your project succeeds. You might assume that the relief acts as a sort of ‘reward’ for successful innovations. But this is not the case. The relief is, in fact, intended as a reward for trying, even when money and time might be lost in the process.

In fact, failure can help to show that the project was not straightforward and that iterations were required to achieve your solution.

The two things you need to demonstrate in your claim are:

1. Your company sought to achieve an advance in science or technology
2. In seeking the advance, the company attempted to resolve scientific or technological uncertainty

As one example, your company might have developed new software. You might then attempt to integrate that software with an existing platform but, because of the age difference between the systems, they fail to integrate. Even though this project failed, it may still be eligible for R&D tax relief.

The proposed changes that will come into effect in April 2023 will also include a variety of more minor administrative amendments. Companies will now need to notify HMRC that they plan to make a claim in advance. Claims will also need to be made digitally, as HMRC attempts to modernise the tax system.

Key takeaways

The UK’s R&D tax relief scheme presents a strong opportunity for startups to recoup some of the costs involved in research and development. Proposed amendments might make the eligibility criteria a little trickier to navigate. But overall, they’ll expand the boundaries to make it easier for startups to claim more relief.

As a recession looms, it’s important that you take time to consider what this means for your company. It just might help you weather the storm.